[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
THE PROMISES AND PERILS OF
CENTRAL BANK DIGITAL CURRENCIES
=======================================================================
HYBRID HEARING
BEFORE THE
SUBCOMMITTEE ON NATIONAL SECURITY,
INTERNATIONAL DEVELOPMENT
AND MONETARY POLICY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
JULY 27, 2021
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-43
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
45-510 PDF WASHINGTON : 2021
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri ANN WAGNER, Missouri
ED PERLMUTTER, Colorado ANDY BARR, Kentucky
JIM A. HIMES, Connecticut ROGER WILLIAMS, Texas
BILL FOSTER, Illinois FRENCH HILL, Arkansas
JOYCE BEATTY, Ohio TOM EMMER, Minnesota
JUAN VARGAS, California LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam TED BUDD, North Carolina
CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio
RITCHIE TORRES, New York JOHN ROSE, Tennessee
STEPHEN F. LYNCH, Massachusetts BRYAN STEIL, Wisconsin
ALMA ADAMS, North Carolina LANCE GOODEN, Texas
RASHIDA TLAIB, Michigan WILLIAM TIMMONS, South Carolina
MADELEINE DEAN, Pennsylvania VAN TAYLOR, Texas
ALEXANDRIA OCASIO-CORTEZ, New York PETE SESSIONS, Texas
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts
Charla Ouertatani, Staff Director
Subcommittee on National Security, International
Development and Monetary Policy
JIM A. HIMES, Connecticut, Chairman
JOSH GOTTHEIMER, New Jersey ANDY BARR, Kentucky, Ranking
MICHAEL SAN NICOLAS, Guam Member
RITCHIE TORRES, New York PETE SESSIONS, Texas
STEPHEN F. LYNCH, Massachusetts ROGER WILLIAMS, Texas
MADELEINE DEAN, Pennsylvania FRENCH HILL, Arkansas
ALEXANDRIA OCASIO-CORTEZ, New York LEE M. ZELDIN, New York
JESUS ``CHUY'' GARCIA, Illinois WARREN DAVIDSON, Ohio
JAKE AUCHINCLOSS, Massachusetts ANTHONY GONZALEZ, Ohio
C O N T E N T S
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Page
Hearing held on:
July 27, 2021................................................ 1
Appendix:
July 27, 2021................................................ 43
WITNESSES
Tuesday, July 27, 2021
Baldwin, Robert M., Head of Policy, Association for Digital Asset
Markets (ADAM)................................................. 13
Coronado, Julia, President and Founder, MacroPolicy Perspectives. 11
Fanusie, Yaya J., Adjunct Senior Fellow, Energy, Economics and
Security Program, Center for a New American Security........... 7
Friedlander, Julia, C. Boyden Gray Senior Fellow and Deputy
Director, GeoEconomics Center, Atlantic Council................ 5
Levin, Andrew, Professor of Economics, Dartmouth College......... 9
APPENDIX
Prepared statements:
Baldwin, Robert M............................................ 44
Coronado, Julia.............................................. 53
Fanusie, Yaya J.............................................. 58
Friedlander, Julia........................................... 64
Levin, Andrew................................................ 76
Additional Material Submitted for the Record
Himes, Hon. Jim A.:
Written statement of the American Bankers Association........ 81
Written statement of the National Association of Convenience
Stores..................................................... 95
Written statement of Public Citizen.......................... 99
THE PROMISES AND PERILS OF
CENTRAL BANK DIGITAL CURRENCIES
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Tuesday, July 27, 2021
U.S. House of Representatives,
Subcommittee on National Security,
International Development
and Monetary Policy,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2128, Rayburn House Office Building, Hon. Jim A. Himes
[chairman of the subcommittee] presiding.
Members present: Representatives Himes, Gottheimer, Torres,
Lynch, Dean, Ocasio-Cortez, Auchincloss; Barr, Sessions,
Williams of Texas, Hill, Zeldin, Davidson, and Gonzalez of
Ohio.
Ex officio present: Representatives Waters and McHenry.
Also present: Representatives Foster and Emmer.
Chairman Himes. The Subcommittee on National Security,
International Development and Monetary Policy will come to
order. Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time. Also, without
objection, members of the full Financial Services Committee who
are not members of this subcommittee are authorized to
participate in today's hearing.
Today's hearing is entitled, ``The Promises and Perils of
Central Bank Digital Currencies.'' Before I recognize myself
for an opening statement, I will just note for the witnesses
and anybody watching at home on TV that this is a hybrid
hearing, so there are actually people participating who are
tuning in virtually. That should be managed. We have done it
before. It should be managed well, but there will be moments
when questions do come in from people who are participating
remotely, just so the panel is aware of that fact.
With that, I now recognize myself for 4 minutes to give an
opening statement, and to welcome the witnesses to this
important hearing.
Money and payment systems have been around for thousands of
years, but what we think of as money and paying for goods today
would have been unimaginable even to our grandparents, who
carried cash and sometimes wrote checks. Technological
innovation in the last 2 decades has transformed money, payment
systems, and banking. The rapid growth of crypto assets,
digital currencies, and peer-to-peer networks facilitate
business transactions and quicker international payments,
amongst other things. However, as is true with all innovation,
there are potential downsides. Those of us charged with
oversight and policymaking must grapple with user anonymity,
cybersecurity, investor protection, and market safety, among
other challenges posed by this innovation.
Today, in a very timely fashion, we grapple with the
potential benefits and drawbacks of creating government-backed
digital currencies. The decisions that emerge in legislation
and regulation will significant shape the world of finance.
Some 81 nations, including our own, are now exploring a
central bank digital currency (CBDC). While some countries are
moving faster than others, each central bank has its own policy
objectives and expectations.
The Federal Reserve's forthcoming White Paper on digital
payment systems will likely provide insight into how the Fed
believes the U.S. should approach and monitor these issues in
the years ahead. Vice Chairman Quarles, in a speech notably
entitled, ``Parachute Pants and Central Bank Money,'' suggested
that all of this activity might be a bit of a fad.
No single policy change or set of regulations will solve
all of the challenges in this arena. The choices we make
regarding a central bank digital currency will have both
positive aspects and drawbacks. A U.S. central bank digital
currency could potentially draw unbanked Americans into a
formal and lower-cost banking system, it could provide the
Federal Reserve with greatly enhanced policy tools, and it
could be a prudent response or alternative to the Wild West of
privately sponsored cryptocurrencies.
However, a central bank digital currency could cause
significant disruptions in the existing banking sector.
Particularly since the Federal Reserve is looking to the
Congress for direction and authority, legislative inaction,
which sadly has become something of a default setting in this
institution, will be a choice, and not necessarily a good one.
Widespread global adoption of other central bank digital
currencies, particularly the Chinese digital currency, could
erode the highly advantageous role of the dollar
internationally.
Since World War II, the U.S. dollar has been the primary
global reserve currency. The strength and stability of our
currency has helped secure our position as the world leader in
finance, and been a reliable mechanism to facilitate trade and
our borrowing needs. The extensive use of the dollar in foreign
markets also provides us, and U.S. officials, with important
tools to crack down on criminal groups, monitor illicit
activity, and tighten the screws on those who would threaten
America or its allies.
Much has been said about the Chinese digital yuan and the
possibility that the Chinese government will attempt to usurp
the dollar as the reserve currency, but we must also be mindful
of the actions by our allies. If the U.S. moves too slowly, we
risk being overtaken. Today, in my opinion, we are behind.
Following the rest of the world in innovation is not a
traditional American experience.
These are all difficult decisions, and we must approach
them with an open mind. We need to work together to foresee the
unintended consequences, understand the expected tradeoffs, and
stay a step ahead of potential challenges.
With that, I would like to again welcome this terrific
panel of esteemed witnesses, and to recognize the ranking
member of the subcommittee, Mr. Barr, for 4 minutes for an
opening statement.
Mr. Barr. Thank you, Mr. Chairman, for holding this very
important hearing. And thank you to our witnesses for joining
us today. I look forward to an engaging discussion.
The development of new technologies and changing consumer
behavior have resulted in drastic changes to our payments
systems. Frictions previously associated with the transfer of
funds from person to person or business to business have eased
significantly. As the landscape continues to shift, central
banks are exploring the digitization of their currencies.
There are many potential benefits associated with the
development of central bank digital currencies, including
easing transactions and reaching previously underserved
populations. However, we must also be mindful of the potential
negative national security implications, including CBDC's use
in financing illicit activities of evading sanctions, and the
long-term consequences if we lose our competitive edge to
countries like the People's Republic of China.
According to recent data published by the Atlantic Council,
since 2014, dozens of central banks have begun exploring CBDCs.
Thirty-two countries are in the research stage and 35 have
either launched a CBDC, conducted a pilot, or are in
development. In the United States, as the chairman noted,
Federal Reserve Chair Powell has indicated that the Fed is
closely examining the concept of a digital dollar and plans to
release a White Paper on the subject in the coming months.
One area of potential promise of a U.S. digital dollar is
expanding financial access and inclusion for unbanked
individuals. A recent FDIC survey found that roughly 14 million
American adults did not have a bank account. It is possible
that lower system costs and digital wallets tied to CBDCs may
provide access to underserved populations.
Meanwhile, China is pressing ahead in its development of a
CBDC, and has already launched pilot programs of its digital
renminbi with major retailers in select metropolitan areas. In
2016, then-People's Bank of China Governor Zhou Xiaochuan
stated that his ambition was to eventually replace cash in
China with its digital renminbi. Beneficial to the Chinese
Communist Party (CCP) is the fact that a widespread adoption of
a digital currency would allow them to track every purchase,
expand domestic surveillance initiatives, and exert greater
control over private transactions. The CCP may even use its
new-found visibility into transactions as a tool to enforce
party discipline.
China has made clear their motives to challenge the United
States as the preeminent global economic power. The development
and implementation of a digital currency is one of several
steps in their quest as they seek to usurp the dollar as the
world's reserve currency. As policymakers focus on national
security implications of financial services, we must closely
monitor China's actions and appropriately react to these
developments.
While it is imperative that the United States not cede its
competitive advantage, we must not rush the process for the
sake of simply keeping up. With a development of this
importance, magnitude, and potential long-term impact, we must
realize that getting it right is more important than getting it
done fast. In this regard, I agree with Chairman Powell, who
last year stated, ``It is more important to get it right than
to be first, and getting it right means that we not only look
at the potential benefits of CBDC but also the potential
risks.''
We must also carefully deliberate the appropriate role of
the Fed in issuing a CBDC. Should it approach the program
alone, going directly to consumers and taking on the roles and
responsibilities traditionally held by private institutions,
such as customer service, transaction verification, and Anti-
Money Laundering (AML) and Know Your Customer (KYC) compliance,
or should the Fed approach the issue in coordination and
partnership with the private sector? I hope our hearing today
will help inform our thinking as we weigh the benefits and
potential costs of CBDCs, specifically in the context of U.S.
national security and the appropriate role of the Fed.
I yield back.
Chairman Himes. The Chair thanks the ranking member, and
now recognizes the Chair of the full Financial Services
Committee, the gentlewoman from California, Chairwoman Waters,
for 1 minute.
Chairwoman Waters. Thank you, Chairman Himes, for hosting
this hearing, part of a series that this committee has been
holding on the policy, law, and regulations surrounding digital
assets. The Federal Reserve is at the center of our response
whenever the economy enters a recession, and thus it is vital
that our central bank has powerful tools to achieve its
mandate. A central bank digital currency, or CBDC, is one
potential tool.
In addition to economic matters, as the Fed considers CBDC
adoption, Congress must also be mindful of how proposed models
will affect the global influence of the U.S. dollar, advance
efforts to fight financial crime, impact communities of color,
enhance financial inclusion, and balance privacy with the
transparency needed to defend the financial system from abuse.
I look forward to the witnesses' comments, and I yield back
the balance of my time.
Chairman Himes. The Chair thanks the Chair of the Full
Committee, and now recognizes the ranking member of the Full
Committee, the gentleman from North Carolina, Ranking Member
McHenry, for 1 minute.
Mr. McHenry. I thank the Chair for holding this great
hearing today. This is a subject with which Congress must
wrestle.
As Fed Chair Powell says, it is better for the U.S. to get
a central bank digital currency right than to be first. We are
certainly not going to be first, but we have to wrestle with
privacy rights and civil liberties, something that the Chinese
do not care a whit about. And I agree with my colleagues that a
digital yuan has national security implications for the United
States. However, a central bank digital currency is not the
only tool to compete with China. We should be looking at how we
are better than China, how do we improve ourselves, how do we
ensure that private sector innovation continues, how we see
competition, and competition bringing the best products to
market and letting that competition encourage the U.S. dollar
in making cross-border payments faster and cheaper.
There is a lot of work to be done, but I am glad we are
jumping into the fray. Congress must wrestle with this, and it
is on us to legislate this into existence if that is the right
thing to do.
And with that, thank you, Mr. Chairman.
Chairman Himes. The gentleman yields back.
Today, we welcome the testimony of our distinguished
witnesses: Ms. Julia Friedlander, the C. Boyden Gray Senior
Fellow and Deputy Director of the Atlantic Council; Mr. Yaya
Fanusie, an Adjunct Senior Fellow for Energy with the Economics
and Security Program at the Center for a New American Security;
Dr. Andrew Levin, a Professor of Economics at Dartmouth
College; Dr. Julia Coronado, the President and Founder of
MacroPolicy Perspectives; and Mr. Robert M. Baldwin, the Head
of Policy at the Association for Digital Asset Markets.
Witnesses are reminded that their oral testimony will be
limited to 5 minutes. You should be able to see a timer on the
desk in front of you that will indicate how much time you have
left. When you have 1 minute remaining, a yellow light will
appear. I would ask that you be mindful of the timer, and when
the red light appears, to quickly wrap up your testimony, so
that we can be respectful of the other witnesses' and the
committee members' time.
And without objection, your written statements will be made
a part of the record.
Ms. Friedlander, you are now recognized for 5 minutes to
give an oral presentation of your testimony.
STATEMENT OF JULIA FRIEDLANDER, C. BOYDEN GRAY SENIOR FELLOW
AND DEPUTY DIRECTOR, GEOECONOMICS CENTER, ATLANTIC COUNCIL
Ms. Friedlander. Good morning, and thank you, Chairman
Himes, Ranking Member Barr, and esteemed members of the
subcommittee for the opportunity to speak to you today about
central bank digital currencies and their role in global
finance.
My name is Julia Friedlander. I am the C. Boyden Gray
Senior Fellow and Deputy Director of the GeoEconomics Center at
the Atlantic Council. I lead our work on economic statecraft,
that is, the use of financial, economic, and regulatory tools
in foreign policy. I have served as an economist at the CIA, as
a Senior Advisor at the Treasury Department's Office of
Terrorism and Financial Intelligence, and 3 years on the
National Security Council staff. This decade of Federal service
gave me an acute sense of how financial regulation intersects
with national security and the role of the United States in
global standard-setting based on entrepreneurialism, rule of
law, and respect for the rights of the individual.
Last week, the GeoEconomics Center launched the newest
version of its CBDC tracker, which follows the progress of
research, design, development, and piloting around the world.
You can explore it at AtlanticCouncil.org. The database
features 81 countries, more than double the number we
identified one year ago. Five countries have fully launched a
digital currency, while 14 others are in the pilot stage, like
South Korea and Sweden. However, of the four most influential
central banks in the world--the U.S. Federal Reserve, the
European Central Bank (ECB), the Bank of Japan, and the Bank of
England--the United States is the furthest behind.
Countries are pursuing CBDCs for a variety of reasons.
COVID-19 obviously played an outsized role. The need to deliver
unprecedented fiscal and monetary stimulus called for
innovation in payment systems. Another is the rise of
cryptocurrencies and stablecoins. Some central bankers fear
losing control of monetary sovereignty while others see
stablecoins as a potent complement to the existing financial
system.
And, of course, there is Beijing. As of June 2021, the
People's Republic of China announced corporate and personal
wallets valued at over $5 billion, and has begun groundwork for
cross-border transactions with Thailand, the United Arab
Emirates, and Hong Kong. These tests are limited to bank-to-
bank transactions, not retail.
I would like to emphasize, however, that this is not only a
story about how we manage China. Around the world, central
bankers recognize that they cannot ignore the advent of new
forms of digital money. I will touch on three national security
considerations from our research.
First, countries researching or testing CBDC use KYC
procedures similar to the traditional banking sector, but are
developing different thresholds to balance KYC with financial
inclusion and lowering barriers to instant payments. This could
lead to a patchwork quilt of regulations and operating
platforms, making KYC ineffective.
Second, what one country calls, ``due diligence,'' may be a
data privacy violation and illegal state-led surveillance in
another, complicating cross-border transactions or risking
personal safety and industrial espionage. Nation states and
hackers linked to organized crime could target CBDCs to attain
sensitive data and funds or destabilize the global financial
system.
Third, the role of the U.S. dollar. The dollar continues to
dominate international commerce, reflecting the attractiveness
of the U.S. economy as a safe haven for investment. We see no
immediate threat to its role in financial settlements and debt
markets or in global reserves. Most CBDC programs are focused
on domestic use cases, not international transactions.
Compatibility and widespread standardization are a prerequisite
for a CBDC to challenge the financial system as it currently
is.
However, in the medium to long term, if CBDCs demonstrate
superior effectiveness in the speed and cost of transaction,
they could begin to undermine the dollar's status. If countries
are able to build wholesale, cross-border CBDC mechanisms at
scale, these payment systems could begin to replace SWIFT and
other messaging systems. This could, over time, reduce the
share of international trade and capital flows denominated in
dollars.
How might this happen? Over time, countries may develop
cross-border interoperability that settle transactions
instantaneously. The dollar would become a technological
laggard. In the private session we convene at the Atlantic
Council, we have heard from other nations that are eager to
hear from the U.S., and without our guidance, may look to China
on how to build a CBDC.
Chair Powell has emphasized that as the issuer of the
world's reserve currency, it is more important to be right than
to be first. This is prudent, but the Fed risks allowing a
fractured digital currency ecosystem to evolve in a way that
does not protect privacy and security. The U.S. must innovate
through a position of strength. This does not necessarily mean
issuing a digital dollar. Instead, the U.S. can galvanize
international coordination and ensure that countries create
digital currencies that are both safe from attack and safeguard
citizens' data.
Currently, there is a patchwork of regulatory bodies that
claim some jurisdiction over development, but the U.S. has been
able to bring solutions to the table.
Chair Powell has been clear that he does not believe the
current language in the Federal Reserve Act allows him to
create a digital dollar. If Congress believes in the digital
dollar, it should consider authorizing a pilot program,
ensuring a role for Treasury and varying bodies in the
oversight and coordination process, or amend the Federal
Reserve Act. In countries with a pilot program, other than in
China, the legislature has been a key player in the process.
U.S. legislation would have a positive ripple effect around
the world. It would show that we are at the forefront of
innovation and compel other countries to coordinate with us.
Countries exploring cross-border testing with China might worry
that partnership with the digital yuan would preclude a
partnership with the digital dollar.
The U.S. need not roll out a large-scale CBDC, but we need
to start a new, serious conversation. For the world's largest
economy, the global financial leader, and the creator of the
Bretton Woods system, the risk would be to do nothing. In
finance, the first mover has an advantage in setting the
international operating environment, and the U.S. is a force
multiplier. We can and should lead the world in the development
of a safe and secure CBDC.
Thank you for the opportunity to appear before this
subcommittee, and thank you for focusing on this very important
issue.
[The prepared statement of Ms. Friedlander can be found on
page 64 of the appendix.]
Chairman Himes. Thank you, Ms. Friedlander.
Mr. Fanusie, you are now recognized for 5 minutes for an
oral presentation of your testimony.
STATEMENT OF YAYA J. FANUSIE, ADJUNCT SENIOR FELLOW, ENERGY,
ECONOMICS AND SECURITY PROGRAM, CENTER FOR A NEW AMERICAN
SECURITY
Mr. Fanusie. Thank you. Chairman Himes, Ranking Member
Barr, distinguished members of the subcommittee, and my fellow
panelists, it is an honor to participate in today's hearing.
CBDCs inevitably, I believe, will become some part of our
global economic landscape. In my testimony, I will offer
framing to understand the rise of CBDCs, outline some of the
geopolitical positioning currently underway around the
technology, and explain the policy posture needed to navigate
the opportunities and threats that a CBDC environment may bring
to U.S. national security.
First, it is best to frame CBDCs not just as a monetary
development but as a data development. For example, China's
motivation for its digital fiat currency is rooted in the
Chinese Communist Party's push for national financial
technology development, which is focused on building a data-
driven digital economy.
Online retail bank accounts, mobile payments, distributed
ledger technology, and smart contract programmability are part
of a range of software innovations that currently are unlinked
to central bank money. CBDCs are an attempt to integrate the
world of central bank money directly with both conventional and
emerging data technology.
Whether or not CBDCs hold either more promise or more peril
for U.S. national security will depend on how well the United
States crafts policy to partake in and influence the march of
Fintech innovation emerging globally.
Here are some important strategic points or considerations
that I think policymakers must address for a sound national
security-informed approach to the rise of CBDCs.
One, correspondent banking, the high chance that
correspondent banking will be disintermediated on some level
when CBDCs proliferate. Now, private banks will not become
obsolete, but banks will need to augment their services to
maintain relevance in a world where users digitally possess
direct liabilities with their central bank and can transact
more seamlessly with foreign counterparties online. So, private
banks will need to find revenue models revolving around data
and software-related services to remain profitable in a CBDC
world, although they will also have to be informed by data for
their manual due diligence commitments.
Also, whomever governs or influences the international
CBDC-to-CBDC architecture is likely to gain considerable
geopolitical power. Earlier this year, China's central bank
proposed rules for CBDC interoperability across jurisdictions
at a Bank for International Settlements seminar. The BIS also
could become an environment where CBDC software is recommended
or authorized for all central banks. China currently has the
most progress in CBDC piloting among major economies. The U.S.
will need to increase its CBDC expertise and assert greater
influence in the BIS and other international fora that guide
CBDC development.
Also, CBDCs could be weaponized in some way to retaliate
against the United States. Depending on how a global CBDC
system is governed, it could be possible for a bloc of
countries to restrict the United States from an international
CBDC apparatus that operates outside the SWIFT messaging
system. Also, a foreign government's control over its CBDC
infrastructure may make it easier for that government to block
local CBDC accounts or wallets used by U.S. companies operating
in that country.
U.S. economic policymakers are going to need more
collaboration with computer scientists. Economists at the Fed
are going to have to increasingly wrestle with complex computer
science problems as they assess the possibilities. The Boston
Fed's current partnership with MIT is an important step in CBDC
research, but given the global pace of CBDC development,
multiple Fed branches probably should collaborate with
university computer science departments around the country for
more extensive research.
Also, fine-tuned rules around data privacy will be needed
if the U.S. launches a digital dollar. CBDC transactions, even
if anonymized, will comprise a new data stream that could help
the government and private firms improve financial services,
but more specific guidelines on data access must be mapped out.
Will law enforcement have real-time access to the raw,
anonymized data feed? Policymakers and technologists must
create parameters, not only around what entities can directly
acquire CBDC data, but precisely how much of it, and for how
long.
The growing exploration of CBDCs does not mean that all
nations will develop one in the near future. But with all of
the CBDC research and piloting occurring, it seems highly
likely that the world will not return to the status quo of a
decade ago when there was no foreseeable technological shift in
central bank money governance. Instead of asking if CBDCs will
proliferate, the U.S. inquiry should be, how will they develop
and what should their governance be across the borders?
Despite some of the accompanying risk from CBDCs that I
have outlined, the sound policy posture is not to seek to stop
the development of this technology. The U.S. position should be
to promote, harness, and shape Fintech innovation so that it
aligns with American interests and values. This may manifest in
the U.S. deploying a digital dollar, but either way, the United
States must prepare for a world where CBDCs operate in the
global economic landscape.
Thank you, and I look forward to your questions.
[The prepared statement of Mr. Fanusie can be found on page
58 of the appendix.]
Chairman Himes. Thank you, Mr. Fanusie.
Dr. Levin, you are now recognized for 5 minutes for an oral
presentation of your testimony.
STATEMENT OF ANDREW LEVIN, PROFESSOR OF ECONOMICS, DARTMOUTH
COLLEGE
Mr. Levin. Chairman Himes, Ranking Member Barr, and members
of the subcommittee, thank you for inviting me to testify at
this important hearing. I will highlight how the establishment
of a digital dollar provides a crucial opportunity to improve
the payment system for small businesses and ordinary families,
and I will underscore the urgency of moving forward promptly on
this initiative.
My written testimony highlights the views of small business
owners in my region, and actually, there are some slides that
are a handout for you to look at, too.
For example, Sean Taylor recently achieved his dream of
starting his own barber shop, called The People's Barbershop,
in Hanover, New Hampshire. His business has been thriving, and
he has now hired his first apprentice, Charlie Foster. On
average, about 3 percent of the price that Sean receives for
every haircut is being transferred to huge, multinational
payment providers--3 percent.
I have heard similar concerns from many other small
business owners, such as the founders of the Norwich Farm
Creamery. Again, you can see their photograph in the slides.
And I gained numerous insights from Becky Dayton, who has
been running The Vermont Book Shop for the past 16 years. Becky
says, ``I am working extra hard to keep this little bookstore
alive in my community.''
The same issues are faced by small businesses across the
country, including online retailers as well as brick-and-mortar
firms. It is not surprising that small businesses are uniformly
enthusiastic about the prospect of establishing a digital
dollar. It would be secure, convenient, and costless for both
the payer and the payee. Cutting payment transaction costs will
help foster more business startups and entrepreneurs, and
create more jobs.
In joint work with my colleague, Michael Bordo, we have
concluded that a digital dollar is technologically feasible and
eminently practical, and we have formulated the following set
of basic design principles. Again, these are listed on your
handout.
1. The Federal Reserve will be responsible for managing the
centralized ledger. Supervised financial institutions provide
digital dollar wallets for their customers. We call this a
public-private partnership. It is standard in infrastructure
and many other types of public-private operations. This
approach will foster competition and protect personal privacy.
2. With a centralized ledger, every payment transaction can
be transmitted instantaneously and securely, at practically
zero cost, and the risk of fraud can be mitigated by standard
methods such as two-step verification.
3. The digital dollar should be usable for all public and
private payment transactions, as legal tender. But consumers
should be free to use other forms of payment, including paper
cash, and this is, again, a very dramatic difference from the
design that the People's Bank of China (PBOC) is developing.
4. Digital dollar accounts should bear essentially the same
rate of return as U.S. Treasury's. Now, that might seem like a
dramatic development, but in fact, the Federal Reserve has
already implemented similar measures, mostly for the benefit of
high-net-worth individuals and institutions. With the
establishment of a digital dollar, consumers and small
businesses will be able to receive a competitive interest rate
on their everyday payment accounts.
5. Given that funds held in digital dollar wallets will be
fully secure, safeguards will be needed to disincentivize high-
net-worth individuals and institutions from making huge
transfers into digital dollars at times when the financial
system is under stress.
6. The interest rate on digital dollars should become the
Fed's primary monetary policy tool, and that will strengthen
the Fed's ability to carry out its dual mandate.
Now, I want to just highlight some factors that call for
moving ahead promptly and establishing a digital dollar.
One, the dollar is the key pillar of the global economy, as
evidenced by trade invoices and debt securities. And I think it
is absolutely critical for the Federal Reserve to move quickly
in creating a digital dollar. The European Central Bank (ECB),
the Bank of England, and other major central banks are moving
forward promptly. The Fed needs to do the same.
Two, as others have said, the Federal Reserve needs to play
a key role in the design of the cross-border currency exchange
platform. It is just inexcusable for the Fed to stand back and
let other major central banks take that role.
Three, Facebook and other big tech firms are moving ahead
quickly in launching their own digital currencies, called
stablecoins. If that happens, and those stablecoins dominate
the U.S. payment system, the banks will be dramatically
affected too. But it will also be a regulatory nightmare for
regulating consumer privacy and equitable treatment of small
businesses. So again, it is not just that China is the threat;
the whole digital landscape is changing, and the Fed needs to
catch up.
Finally, the Federal Reserve Act does not require Federal
Reserve notes to be issued as paper bills. Congressional
legislation is not a prerequisite for the establishment of a
digital dollar. But the U.S. Congress is the Fed's boss. You
are the boss, and hearings like this are crucial for overseeing
the Fed's role in ensuring that the payment system works
effectively for small businesses and ordinary families across
the country.
Thank you for your consideration. I will be glad to answer
your questions.
[The prepared statement of Dr. Levin can be found on page
76 of the appendix.]
Chairman Himes. Thank you, Dr. Levin.
Dr. Coronado, you are now recognized for 5 minutes for an
oral presentation of your testimony.
STATEMENT OF JULIA CORONADO, PRESIDENT AND FOUNDER, MACROPOLICY
PERSPECTIVES
Ms. Coronado. Thank you very much. Thank you for the
opportunity to testify. I also have a set of exhibits at the
back of my testimony.
My name is Julia Coronado. I am the founder of MacroPolicy
Perspectives. I have spent my entire adult life in the
financial services industry, from being a bank teller, to a
staff economist at the Federal Reserve Board, to chief
economist at one of the largest global investment banks. I also
teach macroeconomics to business school students at UT Austin.
I stress to my students that the U.S. dollar did not become the
global reserve currency overnight. It is a story of evolution,
and the job is never done.
Digital currencies present a challenge to the U.S. and
other countries, and we must rise to that challenge. If we do
it well, we can improve the safety and soundness of our
financial system and enhance the equity and efficiency of
monetary policy.
My remarks will draw on a proposal I put forth with Simon
Potter. We propose the creation of a new system of regulated
financial institutions called Digital Payment Providers to
facilitate fast and expensive retail payments for consumers
through the use of a digital currency backed by reserves at the
Fed. Much like the current banking system, a two-tiered system
would promote competition and continued innovation, while Fed
oversight would promote safety and soundness. Our proposal
would limit account size to preserve the role of the fractional
reserve commercial banking system.
The proposed system would help the Fed ensure that the
valuable public good of a stable currency survives the
transition to a digital age, while using lower costs to reach
the underbanked who have not benefitted from the payment
convenience and security offered by the current banking system.
Relying on the private sector alone to offer the benefits
of new technology, as the U.S. is currently doing, introduces
significant and growing sources of systemic risk. The Fed would
need to invest in a new infrastructure that establishes and
monitors a rigorous standard for cybersecurity, consumer
privacy, and system resiliency. The Fed would not have access
to individual data but could establish and monitor standards
for consumer privacy. Our current lack of digital
infrastructure has left our economy vulnerable to increasing
attacks. An important byproduct of a CBDC will be a public-
private partnership that confronts the most significant risk to
the functioning of our market economy.
Some Fed officials have urged the need for caution, given
the dollar's role as the global reserve currency. I cite that
as a need to move forward with urgency. Private
cryptocurrencies are proliferating that pose risks to financial
stability. Other countries are advancing the ball on CBDCs. The
U.S. should not just be engaged, but be playing a leadership
role.
Digital currencies also present an opportunity to make
monetary policy more equitable and efficient. Why does the Fed
need a new tool for monetary policy? Interest rates have fallen
around the world in recent decades, leaving the Fed and other
central banks increasingly reliant on balance sheet policy to
achieve their goals. Bond purchases work by lowering long-term
rates and boosting asset prices. The Fed has faced the critique
that its policies exacerbate inequality, and boosting asset
prices does make the rich richer. However, the alternative is
to allow unemployment to increase, disproportionately harming
lower-wage and Black and Brown workers. Doing nothing is not an
option, but the Fed lacks the tools to boost the economy in a
more equitable fashion.
Digital accounts can add a more equitable tool. We propose
the creation of recession insurance bonds--zero-coupon bonds
authorized by Congress, calibrated as a percentage of GDP
sufficient to provide meaningful support in a downturn. The
Treasury would hold these securities on behalf of the public.
The Fed would purchase them in a downturn and credit household
digital accounts.
Cash transfer may sound like the domain of fiscal policy,
yet it precisely mirrors the permanent expansion of the money
supply Milton Friedman described as, ``helicopter money.'' The
COVID recession confirmed that interest rates and balance sheet
policy remain powerful tools, yet we have also seen that
providing cash to households in a crisis is more powerful in
sustaining demand when the economy is hit with a shock that
leads to rising unemployment.
Digital payments could also reduce risks to financial
stability. The Fed's increasing reliance on bond purchases may
be contributing to asset price inflation becoming higher and
more cyclical. Lower interest rates and higher asset prices
spur business investment and consumer spending, which leads to
job creation. Asset prices usually decline in a recession,
which can amplify and deepen job losses. Direct payments to
consumers can stabilize demand in a recession more effectively,
and knowing the Fed possesses such a tool could calm investors
and reduce the need for the Fed to engage in medium-term asset
purchases.
Disruption from technology is an inevitable part of every
industry. It also creates opportunity. Developed together, a
Fed-backed digital dollar, low-cost accounts and payment
processing, and a framework for the Fed to make digital
deposits to consumers could make U.S. institutions able to meet
the challenges of the current global environment. Thank you.
[The prepared statement of Dr. Coronado can be found on
page 53 of the appendix.]
Chairman Himes. Thank you, Dr. Coronado.
Mr. Baldwin, you are now recognized for 5 minutes to give
an oral presentation of your testimony.
STATEMENT OF ROBERT M. BALDWIN, HEAD OF POLICY, ASSOCIATION FOR
DIGITAL ASSET MARKETS (ADAM)
Mr. Baldwin. Chairman Himes, Ranking Member Barr,
distinguished members of the subcommittee, thank you for the
opportunity to testify today. My name is Robert Baldwin, and I
am the head of policy at the Association for Digital Asset
Markets, or ADAM. In this capacity, I oversee the policy and
standards-setting process for the self-governing association,
and work to develop industry best practices that facilitate
fair and orderly digital asset markets. Prior to ADAM, I served
at the U.S. Department of the Treasury and the Central
Intelligence Agency.
My testimony today seeks to advance a conversation on the
future of U.S. payments. I will focus on the current status of
payments in the U.S., and goals for an advanced payments
system, and I will discuss two leading solutions, including the
development of a central bank digital currency, or CBDC, and
the use of a responsibly managed private sector stablecoin.
Domestic and international payment settlement mechanisms
have not kept up with the recent advances in telecommunications
technology. These complex, decades-old networks are costly,
slow, and susceptible to cyberattacks. However, the
international correspondent banking system has served the
United States very well. The U.S. economy's deep and liquid
capital markets, strong rule of law, and dynamism have enabled
the dollar to become the preeminent global reserve and
transaction currency, accounting for over 60 percent of global
transactions, despite the U.S. making up about a fifth of
global GDP. This has provided the U.S. significant fiscal
space, allowed it to maintain a robust sanctions program, and
has created many American jobs in financial services.
However, the system of payments is facing pressures on two
fronts: first, from international competition, such as China;
and second, from innovations stemming from the development of
blockchain technologies, which allows users to make both large
and small payments in a fast, affordable, and secure manner. It
is imperative that the U.S. looks to the future at this
critical juncture and that the future is likely related to the
use of blockchain technology.
When modernizing our payment system, the U.S. should seek
to establish a consumer-friendly system that benefits domestic
consumers while also making itself attractive for use in
international business. Such a system prioritizes low-cost and
fast payments, individual privacy, transaction transparency and
data control, and ultimately ensures that the U.S. dollar
maintains its prominence in international markets.
One such way to accomplish this is through the
establishment of a central bank digital currency. A CBDC system
offers the potential for speed and cost benefits and offers
promise in areas such as financial inclusion and improved
cross-border transactions. However, a well-designed CBDC is a
considerable undertaking and it will require many intentional
design choices.
Another option is a regulated, private-sector led
stablecoin approach, endorsed by and coordinated with the
Federal Government. This could answer many of the stated goals
and serve in lieu of or in advance of a CBDC. The Federal
approval process for fully reserved, or nearly fully reserved
stablecoins would be audited and would be akin to a one-to-one
stablecoin. This is similar to how the New York Department of
Financial Services provides oversight of its stablecoins. This
system would be built on top of current financial
infrastructure to provide a faster payment layer, and would be
purely opt-in for businesses or consumers seeking to leverage
the benefits of stablecoins.
A stablecoin system would accomplish the core mission of
making payments cheaper and faster, and could likely be
developed and implemented quickly. Some questions on the
functioning of this system remain, but ultimately, it is a very
promising approach.
The U.S.'s strength in the international payments and
financial services space is an American treasure that has
tremendously benefitted the country. The U.S. must continue to
innovate in this space so that it does not fall behind the
pressures from international competition and digitization. The
payment system is a very complex process which must be handled
and studied with great care. New developments in this space
take time to develop, because of the intricacies involved and
the necessity that there are no issues. The U.S. must start to
operationalize testing and design of various approaches to
payment efficiency improvements so when it is time to act,
policymakers have a full suite of options.
Thank you for your time, and I look forward to answering
any questions you may have.
[The prepared statement of Mr. Baldwin can be found on page
44 of the appendix.]
Chairman Himes. Thank you, Mr. Baldwin. We will move now to
questions from the membership of the subcommittee. As a
reminder, we will observe the 5-minute rule. I will ask Members
to wind up their questions within the 5-minute timeframe. I
will allow witnesses to finish answers to questions, within
reason, beyond the 5 minutes, but any questions that extend
past the 5-minute limit will have to be answered in writing for
the record.
With that, I recognize myself for 5 minutes.
I would like to spend a couple of minutes talking about the
risk of inaction. There are a lot of issues at stake here,
including possible threats to the traditional banking system.
The word, ``China,'' gets the Congress these days to sit up
quickly, but it also strikes me that decisions about which
currency one might use have everything to do with baskets of
trade and all sorts of other factors that don't relate to the
nature of the currency, and, of course, the digital yuan is
going to raise all sorts of issues around privacy and control
by the Chinese regime.
I will start with you, Ms. Friedlander, and if I have time,
I will move on to the other witnesses. What is the timeframe,
and what are the indicators, the signals that the United
States, if it were, in fact, behind, as it appears to be, in
the creation of a central bank digital currency, that we would,
in fact, lose the ability to lead and innovate in this area?
Are we talking about 3 months? Three years? Ten years? What
does that look like?
Ms. Friedlander. Thank you. I think it would be difficult
to put an exact timeframe on it, because the current landscape
is so disaggregated. Different countries, as we note in our
tracker, are at different stages of research and development,
all of which are primarily based on domestic use cases.
So, what I would look for as a sign that the U.S. has
missed the mark or missed the train leaving the station would
be widescale adoption of a central bank digital currency and
cross-border use.
Currently, there are only two pilot cases of this, one
which is between China and UAE, and I believe one other
country--Thailand, excuse me--and another between UAE and Saudi
Arabia. Those are really only bank-to-bank transactions. They
are not for large-scale wholesale use.
So, I would look for indications that the model was
internationalizing by another country. And that means that we
really haven't--as we have all noted here, it is time to move,
but we certainly haven't missed the ball by any stretch of the
imagination. This is the time for Congress, and for the Federal
Reserve, in collaboration with BIS, and we argue the G-20, to
really develop consensus on all of these criteria for
adaptation globally that reflect our values, based on privacy
and industrial espionage, and all of the things that we have
noted elsewhere.
Chairman Himes. Thank you.
Dr. Levin, your testimony had a whiff of urgency to it. Do
you agree with that? Do you think we are at risk of losing out
here, and in what timeframe?
Mr. Levin. You have to imagine central banks tend to be
sort of conservative, and the association of central banks,
that is called the BIS, the Bank for International Settlements,
is traditionally very conservative. The general manager of the
BIS has said that it is a wake-up call for central banks. He
has said very clearly that central banks need to introduce
their own sovereign digital currencies. The European Central
Bank has already indicated that they are going to do it. The
Bank of England has come pretty close to saying that now.
The problem here with delay is that even if these
currencies are initially introduced for domestic purposes,
there will be a cross-border platform. That is part of what the
BIS is working on now, so that these currencies can be easily
interchanged with each other. And if there is no U.S. digital
dollar on that platform, then you better believe that all of
the international trade invoices that have been conducted in
U.S. currencies, even by countries that are not directly
trading with the U.S., they are invoiced in U.S. dollars, they
will all migrate to other digital currencies.
It's the same with sovereign bonds. Many countries issue
sovereign debts that are denominated in U.S. dollars today.
Many corporations in Korea and other countries issue their
debts in U.S. dollars. If there is no U.S. digital dollar on
the cross-border platform, then all of that will change, and it
is probably not 10 years away. It is probably not even 5 years
away. We are probably talking, I would guess, 2 years.
But that means that the Federal Reserve has to catch up. I
think several of you said this earlier. It is not just that the
Fed is kind of right at the cutting edge. The Fed is behind the
curve right now, and it needs to catch up urgently, and it does
not have much time left to do that.
Chairman Himes. Okay, Dr. Levin.
Dr. Coronado, I am almost out of time, so a quick question,
for a quick answer. Addressing the issue of the possible flight
from banking into CBDC in moments of stress, are there other
mechanisms to alleviate that other than caps on the amount of
accounts?
Ms. Coronado. There are potential structures that you can
put in place, but the caps on the accounts is the easiest way
to achieve that. I think it is definitely a solvable problem.
Chairman Himes. Okay. I am out of time. I apologize for
that, but I would like to follow up, perhaps for an answer in
writing for the record on that issue.
With that, I will recognize the distinguished ranking
member of the subcommittee, Mr. Barr, for 5 minutes of
questions.
Mr. Barr. Thank you again, Mr. Chairman, for holding this
important hearing.
Mr. Baldwin, given that China is years into its pilot
program and has expanded its digital currency's availability in
more major markets, is there a risk presently that the U.S.
will cede a global economic competitive advantage to China if
we do not follow suit, and quickly, with a digital dollar?
Mr. Baldwin. China has many structural issues associated
with its central bank digital currency, first of all, a lack of
rule of law, concerns about privacy, as well as capital
controls. Those make it an unappealing option in the
international global sphere if there are no other options. The
U.S. needs to catch up to the Chinese development, but when the
U.S. presents its own alternative, there is an obvious
incentive for the current system to utilize an American-based
system.
Mr. Barr. Okay. Given that, let me drill down on a couple
of follow-ups. If the United States does not proceed with its
own digital dollar, a CBDC, or some kind of private-sector led
stablecoin regulated by the government, what impacts would that
have on the effectiveness of U.S. sanctions, should the
influence of the dollar wane?
Mr. Baldwin. Sanctions authorities and abilities that we
are provided are results of the international correspondent
banking systems. So, the United States' sanctions abilities
would be undermined if alternative systems that do not cross
through traditional U.S. correspondent banking systems are
undermined.
Mr. Barr. And I think Ms. Friedlander also made that case
pretty persuasively.
Final question to you: Describe the digital dollar CBDC
approach versus the regulated, private-sector-led stablecoin
approach. What are the pros and cons?
Mr. Baldwin. Yes. A CBDC approach could take two forms. It
could be in a tokenized form, so essentially a digital dollar
that is transferrable around from different wallets, or it
could take an account-based approach. There are a number of
privacy considerations that need to be taken into account for a
CBDC approach.
A private-sector stablecoin approach would build on top of
existing financial infrastructure, so that would enable faster
payments on a back-end basis and would be primarily opt-in. So,
banks that are seeking to have faster payment settlements could
implement a stablecoin approach to have faster payment
settlement times, and then there could be obvious abilities for
the private sector to innovate at a consumer level, so
providing options for consumers holding stablecoins.
Mr. Barr. Well, for any of our witnesses, does anyone have
an opinion in terms of the competition with China, and other
international competitors? Is there a preferred approach to the
authentic CBDC approach or the regulated stablecoin? Dr. Levin?
Mr. Levin. Yes. I really appreciate Mr. Baldwin's
perspective, but I think that the truth here is that it depends
on how the stablecoin is designed. If you have a stablecoin
where there is 100 percent backing by reserves held at the
Federal Reserve--which is essentially what Dr. Coronado was
describing, and it is essentially what Michael Bordo and I have
been advocating for quite a few years now--okay, it is actually
a narrow bank. And I know that Chairman Himes is familiar with
this issue. A narrow bank means that the deposits that a
customer makes are held 100 percent in reserves at the Federal
Reserve, so it is perfectly safe and secure. And in the kind of
payment system we are describing, it can be instantaneously
transferred.
The point is, if you have a privately issued stablecoin
that does not have 100 percent reserve backing, it is backed by
something else, people are going to have questions about it,
and this is not the first time in history. There have been
other times in the past where there were kind of privately
issued currencies, and they had different values, trading or
exchange rates of the different stablecoins. We cannot have
that kind of thing at the center of our--
Mr. Barr. Thank you for that insight.
Mr. Levin. The bottom line here is that we have to move
forward with a central bank-issued currency.
Mr. Barr. Thank you for that insight. On monetary policy,
Dr. Levin and Dr. Coronado had some views on this. I will have
to say, Dr. Coronado, I was a little alarmed about some of the
concepts that you are putting out there, moving the role of the
Fed into a much more powerful role more nonconventional role.
So with respect to monetary policy, this idea of
strengthening the Fed's ability to foster dual-mandated,
maximum employment and price stability, is there a risk of
giving this kind of power to the Federal Reserve of undermining
price stability and contributing to, for example, inflation?
Mr. Baldwin, do you have a view on that?
Ms. Coronado. I do.
Mr. Barr. Dr. Coronado has a view on that. I have run out
of time. Nobody has answered that question, but perhaps you all
could answer that question in the next round of questioning.
And I am intrigued, Mr. Chairman, by the argument that we need
legislation, and I would like to know also from the witnesses
in the conversation today what that should look like?
With that, I yield back.
Chairman Himes. The gentleman yields back. The gentleman
from New Jersey, Mr. Gottheimer, is now recognized for 5
minutes.
Mr. Gottheimer. Thank you, Chairman Himes and Ranking
Member Barr, and thank you to our witnesses for being here
today.
I am very concerned about the increasing attractiveness of
cryptocurrency and blockchain technologies for illicit actors,
such as foreign terrorist organizations, including Hamas,
Hezbollah, and ISIS, and others, and those who wish to avoid
American sanctions, such as Iran and Venezuela, and domestic
White supremacists, including the Proud Boys and other violent
extremist groups, which were involved in the January 6th attack
on the Capitol.
Mr. Fanusie, if Russia, China, or Iran creates central bank
digital currencies, either individually or in coordination, to
operate outside of the dollar and the technology underpinnings
international money transfers, how would that, do you believe,
impact America's ability to effectively target economic
sanctions on those who wish to do us harm?
Mr. Fanusie. Thank you. That's a very good question. It is
going to depend on exactly how those digital currencies are
governed and what their sort of uptake is. One model is that
accounts are going to be held by banks, that banks are going to
still have to hold these digital currencies, or these CBDCs. So
the question would be, does the U.S. still have leverage to
influence those financial institutions which are disbursing,
which are interfacing with users?
I don't think, in the short term, because Russia or any
U.S. adversary creates a CBDC, that means that then those
institutions within the country, even if it is China, it
doesn't mean that that country is not going to still need
access to the U.S. dollar, to the global financial system. This
is not something that just a technological deployment is going
to give them that much leverage.
I think you have to look at it as a short-term issue versus
a long-term issue. I think the long-term risk is not in, are
these CBDCs proliferating, but the question is, what does the
international CBDC exchange system look like, how many other
parties are actually invested in it, and does that system rival
the conventional systems that we have?
Mr. Gottheimer. Thank you for that. Are there structural
aspects to CBDCs that may be of benefit to America's sanctions
program and our fight against illicit actors in the financial
system?
Mr. Fanusie. That is why that idea of promise or peril is
really good, because on one side, yes, there is this issue of a
long-term lack of sanctions pressure or vulnerability on these
actors. But if you also think about a bigger ecosystem, where
there may be some plusses--for example, if because of the
technology, if we have a system where, whether it is, let's
say, a U.S. CBDC, where now it is easier to do sanction
screening, because of the programmability, right, these are
solutions that even the private sector is trying to do, working
sanction screening into digital currencies.
So, you could imagine that there could be a tradeoff. Now,
I can't say whether it is going to be all this or all that,
because we don't know how this is going to play out. But we
shouldn't underestimate that there will be some positive
factors as well.
Mr. Gottheimer. Thank you so much. Ms. Friedlander, in your
testimony you said, ``Of the four historically most influential
central banks in the world, the United States is the furthest
behind in the work on digital currencies. Furthermore, absent
leadership, the U.S. could miss out on an opportunity to foster
financial inclusion, increase cybersecurity, and maintain
dollar dominance.'''
However, you also said that, ``There are upcoming
opportunities for the U.S. to play catch-up.'' Would you
elaborate on those opportunities and what steps does the United
States need to take to become a leader in digital currency
infrastructure, please?
Ms. Friedlander. Sure. Thank you. I think the first step
would be to openly acknowledge that the United States is
exploring and actively considering a central bank digital
currency. As I noted in my testimony, that doesn't mean that we
actually have to deploy one, but putting our imprint--again, as
the U.S., as the sort of global financial actor of choice, and
countries are coming to us and saying, ``Can you help us design
this?'', using the power of our private sector for design
elements but also our regulatory capacity in multilateral fora
to put together a framework among allied countries that then,
quite frankly, gives China a bifurcated choice, or close to
one. Do you join the international community and multi-
lateralize or do you use this as a force of internal control?
Mr. Gottheimer. Do you think there is a tipping point where
we have waited too long or are too far behind the Chinese or
others to lead in this space, or do you think we have time
here?
Ms. Friedlander. I think we have a limited amount of time,
and I think, as I answered the chairman's question, look for
cross-border use cases of digital yuan. And this is one
benchmark, I think, that was noted in the briefing memo ahead
of the hearing, is BRI, using digital yuan as a method of debt
replaying for individual countries.
So if those are starting to become effective, if countries
are saying, okay, we are turning to China as a model for how we
build this, and not to the United States or not to partner
countries like the U.K.--
Mr. Gottheimer. Thank you. I yield back.
Chairman Himes. The gentleman yields back. The ranking
member of the Full Committee, the gentleman from North
Carolina, Ranking Member McHenry, is now recognized for 5
minutes.
Mr. McHenry. Thank you, Chairman Himes. Mr. Baldwin, the
theme of today's hearing, the promises and perils of a central
bank digital currency, leads me to a fundamental question. When
we look at what they have done in the Bahamas, on the Sand
Dollar, they were trying to solve the movement of hard cash, a
physical asset, among 700 islands. So, that is what they were
trying to solve. What are we trying to solve with the U.S.
central bank digital currency, in your view, Mr. Baldwin?
Mr. Baldwin. At its core, we are looking to solve the issue
of faster and cheaper payments.
Mr. McHenry. Okay. Faster and cheaper payments. So, is the
Federal Reserve the place to do that?
Mr. Baldwin. The Federal Reserve has the ability to do
that, through a CBDC approach. There are also private sector
approaches that could also work, such as the stablecoin.
Mr. McHenry. Okay. Mr. Fanusie, in one of your papers on
China's digital currency, you explain that the eCNY will enable
the CCP to yield punitive control power over Chinese citizens,
in tandem with a social credit system. So, explain that to us.
Mr. Fanusie. Well, it is because the eCNY, the digital
yuan, is just one small part of a broader data strategy that
the CCP has. It is really about integrating all aspects of
data, everything that the government can have its data and can
gain data from, and to utilize it. And whether it is the social
credit system, whether it is anti-money laundering, political
corruption and graft, they are trying to develop a system where
the government is able to use that. And the key thing is to use
financial infrastructure in a way that right now is a little
bit--it is not as streamlined. So, if China now wants to--
Mr. McHenry. But you said, ``punitive.'' What do you mean
by, ``punitive?'' This isn't just data flows and we want to
analyze it and understand our economy. Could this potentially
be to disappear someone, to freeze their assets?
Mr. Fanusie. It is possible if that is what the state, the
Chinese government wants to do, yes, it is very possible.
Mr. McHenry. Okay. We know the story of H&M disappearing
from all digital aspects in China overnight, out of criticism.
Now, we see what happened to Jack Ma. We have seen what
happened with DiDi. These are very public things that we know
about, as Americans.
So, Mr. Baldwin, Mr. Fanusie outlines how the eCNY will
give this heightened level of information about citizens. In
our system, our civil liberties protections are broadly
different, and our assumptions, as Americans, are broadly
different. So, how do we protect that, if it is an entity of
government having those data flows, account-level data flows?
Mr. Baldwin. Personal level information needs to be
anonymized on the system.
Mr. McHenry. Okay. Could stablecoins address this, a
variety of different stablecoins in a regulated environment?
Mr. Baldwin. Yes. The approach I outlined--
Mr. McHenry. Okay. A number of the attributes of a central
bank digital currency.
Mr. Baldwin. The approach I outlined in my written
testimony describes several competing stablecoins. This
information is going to be spread across multiple private
sector entities, and from on-chain blockchain perspective, the
consumer data would be anonymized. So, you would be seeing
wallet transfers between the different wallets, that would
completely anonymize consumer information.
Mr. McHenry. Okay. Right now, we have a painted system
domestically. We are talking about the Fed and the clearing
house having redundancy, having two payment systems, right?
This raises a question: Could a variety of stablecoins create a
competitive force, market force, domestically, that could get
to the question that Mr. Levin raises about really the payments
for the barber shop? Are there attributes of a stablecoin that
could better do that than a central bank digital currency?
Mr. Baldwin. A stablecoin could be implemented on top of
current infrastructure, so it could speed up, on the back end,
settlement processes. So, if you are looking at a retail
provider who is using a Square app, and has a 3-percent fee, a
stablecoin provides the ability to accelerate the transactions
and lower the cost on the system, so it benefits the consumer.
Mr. McHenry. Okay. This is a fantastic panel. Mr. Chairman,
thank you for this balanced panel, because Mr. Fanusie is
talking about the international implications. If we don't move,
as Americans, international settlements, remittances could go
to a regime that we would not like. But domestically, Mr. Levin
raises this question of payments and the cost of payments.
So what I am hearing from this--and tell me if any of you
disagree--is that we have two separate issues we have to
wrestle with, a domestic question and an international
question. Does anyone disagree with that? And, therefore, we
could take two separate approaches on international and
domestic. Does anyone disagree with that?
Okay. I would love to hear your comments in written form,
if you would, about the nuances of what I have missed. But my
time has expired. Ms. Friedlander, I would love to hear your
comments in written form.
Thank you, Mr. Chairman.
Chairman Himes. The gentleman's time has expired. The
witnesses are invited to respond to the ranking member's
question in written form.
With that, the gentlewoman from Pennsylvania, Ms. Dean, is
now recognized for 5 minutes.
Ms. Dean. Thank you, Chairman Himes, and thank you to our
witnesses for sharing your expertise with us today.
Ms. Friedlander, I am thinking in terms of my own
constituents in the Pennsylvania 4th, so suburban Philadelphia.
This might all sound like gobbledygook to them. Could you help
me out and describe, more specifically, how a central bank
digital currency can help expand financial access to them, to
some who are underbanked, unbanked, to some who are poor, to
minority communities who are struggling with access to
financial institutions?
Ms. Friedlander. Thank you, and I will try to get at the
Congresswoman's question in the course of this.
Central bank digital currency, or a fiat-backed stablecoin,
both have the ability to accelerate the pace of payments. Think
about if you are trying to move money from Bank of America to
Chase, or whatever. It takes days. Or, never mind
internationally. This has turnover costs and dead-weight loss
for the broader economy.
What you are saying to an underserved individual is that
you are going to have negligible or no cost of transaction, and
you will be paid either from a financial services provider, or
if you are receiving government benefits, instantaneously
overnight.
Ms. Dean. Thank you very much. What lessons, Ms.
Friedlander, could we learn from the design of other CBDCs like
the Sand Dollar in the Bahamas?
Ms. Friedlander. I think it is important to understand that
each country is designing and implementing a CBDC for a
different purpose. So in the case of the Bahamas, as you note,
it is a financial inclusion issue, after natural disasters
getting payments to individual islands at rapid speed. If you
are talking about a country like Sweden, for example, which
monitors an autonomous currency that is pegged to the euro, it
is more of a question of, what role is a cryptocurrency or
stablecoin going to play in monetary policy, monetary
sovereignty?
For the United States, it really is that question of
speeding up the speed of transactions between financial
services providers. We have a very complicated financial system
in this country. It is regulated on the Federal level, on the
State level, and on the local level, and providing some
clarification on that and streamlining will be very valuable to
the consumer. And I am sure that some of my colleagues here
might agree and elaborate more.
Ms. Dean. Okay. Terrific. Dr. Coronado, in your testimony
you touch on the idea--and this is something that I had
introduced during the COVID pandemic and the economic
collapse--of automatically triggered quarterly economic impact
payments in times of financial downturn. Others on this
committee have been working through some other types of
automatic payments. You touch on this in your testimony as
well.
With your concept of recession insurance bonds, could you
describe what design features of a CBDC currency could increase
the ease, the ability for the Federal Government to supply
payments to the American people, to the point that Ms.
Friedlander was just making?
Ms. Coronado. Thank you. Yes. We have seen that cash
payments can be very effective in stabilizing demand in the
economy. Having a CBDC and a system of digital accounts that is
more inclusive would meant that it is almost instantaneous,
that you could get cash to households, and that you would have
certain--Congress could provide the structure in terms of
limiting it as a percentage of GDP, or requiring certain
triggers, like first, the Fed must cut rates to zero, or some
kind of recessionary indicators. But then you could get those
cash payments out.
And I think one of the things we also believe is that it
might also reduce the need for the Fed to engage in market
interventions like buying corporate bonds, or some of the
extraordinary Facilities that were developed during the COVID
crisis. If investors know that cash is going to households and
that demand will be stabilized, then one of the benefits is
that that will calm markets as well. So, it will both benefit
consumers and probably limit the need for both the Fed and
Congress to act in other ways.
Ms. Dean. And an important reminder of the important
stimulus that we did send out through the CARES Act and other
measures, and then, of course, with the American Rescue Plan,
and how that cash is helping stimulate the economy.
Dr. Levin, I will end with you. Sorry, I have very little
time. Could this system of CBDCs be useful in small businesses,
at times of economic downturn? You were talking about these
very traditional, entrepreneurial small businesses. So for
households, and small businesses, during an economic downturn,
how do CBDCs play into that?
Mr. Levin. I think that it was tragic last year when the
pandemic hit, and Congress acted very quickly and appropriately
to try to help people who were thrown out of work, and families
who were hit really hard. And yet, because many of those people
were unbanked, there were weeks that went by for those checks,
paper checks, to be sent out by Treasury in the mail, and for
people to receive that check and then have to find somewhere to
cash it. That was very sad. We have to make sure that doesn't
happen again the next time around.
So I think, again, part of this urgency here of creating a
digital dollar is to help make sure that when there is that
kind of economic or financial emergency, or public health
emergency, that we can get assistance quickly to small
businesses, too, of course, because--
Chairman Himes. The gentlewoman's time has expired.
Mr. Levin. I'm sorry.
Ms. Dean. Thank you, Mr. Chairman. And I thank the
witnesses very much for your testimony.
Chairman Himes. The gentlewoman yields back. The gentleman
from Texas, Mr. Williams, is now recognized for 5 minutes.
Mr. Williams of Texas. Thank you, Mr. Chairman. And I want
to thank all of our witnesses for coming before us today to
answer some of our questions about digital currency and to give
us a better understanding of the costs and benefits of creating
a new form of the U.S. dollar.
I am in the car business, so I need to know this. It seems
like if we move forward with creating a digital currency, it
would need a lot of additional background support. The Bureau
of Engraving and Printing alone has 1,500 employees, from
support staff to the energy and computing power, to the
cybersecurity necessary to keep all of the infrastructure
secure. This does not appear to be a simple endeavor. And I
want to try to get an estimate of the costs of making this a
reality.
So, Mr. Baldwin, how big of an expansion of government
would it take to create a functional digital currency?
Mr. Baldwin. It would require a large stand-up at the
Federal Reserve, or an operational office, such as Treasury's
Fiscal Service.
Mr. Williams of Texas. Bigger government.
Mr. Baldwin. Larger government.
Mr. Williams of Texas. Okay. The private sector already has
a few different stablecoins that mimic what the Federal Reserve
is considering creating. Whenever I hear the government is
going to come in and create a competition or product or provide
a similar service to the private sector, it really makes me
wonder if it is necessary for the government to get involved at
all, because sometimes that really messes things up.
Ms. Friedlander, can you talk about what is necessary for
the Federal Reserve to create a digital currency when there are
already alternatives in the private sector?
Ms. Friedlander. I would argue that there is a bit of a
false dichotomy, perhaps, an either/or scenario, between the
CBDC and the stablecoin. There are feasible uses for each that
would fulfill different roles in the U.S. economy. If you are
talking about retail sales, maybe you want to use a stablecoin.
You are paying for something. But I find it hard to imagine
that receiving government benefits would be effectuated by a
private entity like that and would be much better served by the
central bank, by the Fed. That is not to say that the private
sector wouldn't be key in the design and consumer framework for
implementing and deploying the CBDC.
So, what we are really looking at is a complementary
ecosystem here where both can serve efficient purposes.
Mr. Williams of Texas. Okay. I have met with some companies
and organizations in my district back in Texas that have
described how cryptocurrencies are already transforming the
payment space. I spoke with one individual who was about to
transfer some of his wages into digital dollars and send some
of his earnings back to his family in Honduras. This cross-
border transfer was able to happen quickly and without any high
fees.
All of this innovation is happening in the payment space
without the government having their own digital dollars. So,
Mr. Baldwin, do we risk stifling some of this progress if we
create our own digital currency?
Mr. Baldwin. I could see the two processes working
together, but ultimately, private sector innovation has led to
the core technology that is enabling the discussion that we are
having today. It is the coins, the blockchain technology which
has allowed the potential for CBDC and a stablecoin approach.
So, it is private sector innovation that has developed these
new technologies that we are leveraging for more noble
purposes.
Mr. Williams of Texas. Private sector is still the best,
isn't it?
Mr. Baldwin. Yes, sir.
Mr. Williams of Texas. Thank you. Mr. Chairman, I yield
back.
Chairman Himes. The gentleman yields back. The gentleman
from Massachusetts, Mr. Auchincloss, is now recognized for 5
minutes.
Mr. Auchincloss. Thank you, Mr. Chairman, and to our
assembled witnesses. As I was reading the material for this
hearing, I found the case for CBDCs for geoeconomics and
strategic purposes very compelling, and I understand why the
United States needs to catch up, both to retain its economic
leverage, and to maintain the U.S. dollar as the reserve
currency. This makes a lot of sense to me.
I do have some significant concerns about domestic use
cases for CBDCs, and I think as a starting point, Ms.
Friedlander, I am wondering if we can have a two-tiered
approach here, if we could move ahead with a federally
controlled digital currency for use internationally, while
holding back on any domestic use cases until we can do more
interrogation of that? Is that even a possible path forward?
Ms. Friedlander. Potentially, but I would say that looking
at the countries that are further along than we are, this is a
revolutionary technology in the financial world, that working
it out domestically is much more sort of biting things off as
you can chew, on a regulatory front, especially when you want
to then proliferate U.S.-based standards internationally. So,
especially if the U.S. dollar maintains its role as the global
reserve currency, you are going to want to define those
standards at home before you deploy them abroad.
I would not necessarily advise that approach, even if it
were technically feasible.
Mr. Auchincloss. Do any of the other witnesses disagree
with that assertion, or does anybody have anything further to
add? Dr. Levin, in the next 20 seconds?
Mr. Levin. I will try to be brief, but I wanted to connect
this to what Congressman Williams said. Ordinary families
actually like using U.S. dollars. And just an example of this,
the Norwich Farm Creamery, all of their products--ice cream,
milk--
Mr. Auchincloss. Dr. Levin, I apologize, but I want to get
directly to the question I asked, whether it would be possible
to proceed internationally without a domestic use case?
Mr. Levin. It does make sense to start domestically,
introduce a currency that is held in wallets, that a lot of
people start using, and that is instant and free. And then, it
would develop cross-border transactions to facilitate
internationally.
Mr. Auchincloss. Mr. Fanusie?
Mr. Fanusie. Yes. I will just add that I think it is a
practical question. If we are going to go to international
discussions, what do we bring to the table? Other countries,
China, what do they have? You think about all of the pilots
that they have. With those pilots, there is a massive amount of
data and analysis. They are learning. They are iterating.
So, if we are in the forum, and it is a bunch of countries
across the table's central banks and China puts all this data,
all these examples of how its trials have worked domestically,
well, what do we have? Just theoretically how should things
work?
Mr. Auchincloss. Wouldn't we have that we are currently the
reserve currency, and thereby, there is a tremendous benefit of
adoption to the digital dollar?
Mr. Fanusie. Yes, you are right. There was always going to
be a place at the table for the United States. The Fed is going
to have a place at the table. We will have a place at the
table. But I say as a practical matter, these are computer
science and data issues. We would really have to be able to get
into the weeds about models, about proposals, and there a are
whole bunch of policy questions that you have to answer,
because you start doing the technical research.
Mr. Auchincloss. Taking that as a jumping-off point in this
final minute, Dr. Coronado, my principal concern with the
domestic use case really is the blurring of the line between
monetary and fiscal policy. I think this builds on what Mr.
Barr was alluding to before he ran out of time. As I was
reading some of these memos, with these direct monetary
transfers, for example, from the Fed to individuals, this
strikes me as fiscal policy, not monetary policy. And I just
have real concerns about an organization as insulated--and it
is designed as such--but as politically insulated as the Fed
taking over fiscal policy from Congress.
Ms. Coronado. Let me clarify. I don't think it is fiscal
policy. I think it is a better form of monetary policy. That
line was already blurred during the COVID crisis when the Fed
extended direct lending to a number of sectors in the economy,
and crossed a number of lines because the economy required it.
And what this would do is just give them a better tool to get
at the root of the problem, which is consumers themselves. Why
do you need to stabilize markets from going into tailspins
because markets are fearful of consumers, of the economy
collapsing? So if you can provide that backstop--and again,
Congress can write the rules here. You can put guardrails on
this. But it is classic monetary policy. It is Milton
Friedman's helicopter drops.
So, I don't agree that that is the critique here. It is
just money creation in a far more efficient way, and I will bet
that we will not have to expand the balance sheet nearly as
much if you give the Fed a tool like this. Four trillion
dollars we have expanded it over the last 18 months.
Mr. Auchincloss. I am out of time. Mr. Chairman, so I yield
back.
Chairman Himes. The gentleman's time has expired. The
gentleman from Arkansas, Mr. Hill, is now recognized for 5
minutes.
Mr. Hill. I thank the chairman. And thank you to the
witnesses. It has been a very good, diverse, and interesting
panel, and we appreciate everybody's participation. I have
certainly been talking about this concept of a central bank
digital currency for over 2 years now, and trying to ask the
best people around the world to think about it.
In 2019, my friend on the other side of the aisle, Bill
Foster, and I wrote the Fed and the IMF about what their
initial views were on a central bank digital currency and what
their efforts were to move it forward. And I think Mr. Foster
and I, in the summer of 2019, found that they were not
interested. I think now, in the summer of 2021, you see
significant work, and as a result, we introduced legislation
together, H.R. 2211, the Central Bank Digital Currency Study
Act, earlier this year, which would require a study and report
by the Fed and other U.S. financial institutions about the
impact a digital currency might have on our financial system
and the economy. And we certainly look forward to that bill
moving forward.
Likewise, I have introduced legislation with our chairman,
Mr. Himes, H.R. 3506, the 21st Century Dollar Act, to make sure
that the U.S. Government has a strategy to ensure that the
dollar remains the primary global reserve currency. And
clearly, the topic we are discussing today indicates how this
will play some future role in that.
The international standing of the dollar should always be
at the forefront of our minds in the development of a digital
currency, whether it is a CBDC or some other kind of stablecoin
option.
I would like to ask my friend, Mr. Himes, if he thinks our
bill, H.R. 3506, and Mr. Foster's bill, H.R. 2211, might be
eligible for markup in the House Financial Services Committee.
Chairman Himes. I thank Mr. Hill, and I think both bills
are important, they are bipartisan, and forward-looking, so I
will push the chairwoman of the committee to bring them
forward.
Mr. Hill. I thank my friend from Connecticut for that, and
for his leadership of this subcommittee.
Personally, I am concerned about this direct account issue.
I am not there yet. I like the idea that there is a blockchain
pay rail out there and that it is a dollar-based digital
currency that America's Congress and Treasury have authorized.
But I am still thinking--I am open to what those intermediaries
on that blockchain rail look like, but I am not yet sold on the
idea of direct accounts, personally. But this conversation is a
big part of that thinking, and as I said, I am grateful for
your contributions.
Mr. Baldwin, do you think it is important, as we think
through the central bank digital currency idea, that we make
sure that the dollar, that is a strategic part of the
discussion, that the dollar we work to make sure it remains the
reserve currency for the world?
Mr. Baldwin. Absolutely. The dollar is the reserve currency
of the world. It provides us so many benefits, ranging from the
ability to conduct fiscal policy on an expanded basis, in
addition to our sanctions authorities.
Mr. Hill. And with your experience at Treasury, I know you
have studied uses of blockchain from a national security point
of view as well, and in the past, blockchain analytic tools
have been successfully employed by cryptocurrency businesses
and financial institutions to mitigate risks related to
traditional cryptocurrencies and to enable them to meet their
AML currency reporting transactions. Can you talk a little bit
about that?
Mr. Baldwin. Yes. It is an example of private sector
innovation. The blockchain space has been around for
approximately 10 years, and when it first came out, there were
a number of questions surrounding how we will be able to trace
these things. But the thing is, they are all in a public
ledger, and as a result there have been a number of firms that
have stepped up to the plate and have developed the capacity to
go and analyze blockchain transactions, and they are able to
follow the on-chain transactions and find flows to elicit bad
actors. In the case of the Colonial Pipeline incident and
hacking, the FBI was ultimately able to track down the funds
and recover them.
Mr. Hill. And likewise on sanctions circumvention, this has
been a good topic today. We have talked about that. The same is
true there, where blockchain analysis can be used to not allow
sanctions to be violated.
Mr. Baldwin. Yes. Analysis of host wallets that are in
foreign countries, such as Iran or North Korea, could track
payments and prevent payments from going to certain places.
Mr. Hill. I thank the chairman, and I yield back.
Chairman Himes. The gentleman yields back. The gentleman
from Massachusetts, Mr. Lynch, is now recognized for 5 minutes.
Mr. Lynch. Thank you, Mr. Chairman. This is a great
hearing. Thank you to all of our witnesses. This has been very,
very helpful.
Dr. Coronado, you mentioned in your opening statement that
the way that the U.S. dollar became the global reserve currency
is a long story, and it really involves a lot of factors. I
would guess that one of those factors is [inaudible].
Mr. Chairman, I am getting a lot of interference. Is
something wrong with the technology?
Chairman Himes. We will just suspend the clock for a
moment. Let's see if we can improve the audio quality, or at
least the volume. Mr. Lynch, we will give you back 15 seconds.
Could the witnesses hear Mr. Lynch?
Ms. Coronado. Barely.
Chairman Himes. Okay.
Mr. Lynch. Dr. Coronado, one of the reasons that we have
the global reserve currency in the U.S. dollar is because of
the rule of law that we have here in the United States,
independent judiciary. There are a lot of reasons that people
trust the dollar, including the reliability of our elections
and the fact that we have a peaceful transfer of power every 4
years.
So when we talk about a digital yuan versus a digital
dollar, and we recognize that China probably has more data on
their individual citizens than any nation on earth--facial
recognition is widely used for oppressive reasons--this digital
yuan would give China a more granular level of surveillance of
financial activity in the country, would it not?
Ms. Coronado. Yes.
Mr. Lynch. So, Mr. Baldwin, how do you think we post up
when we compare a potential U.S. digital dollar versus a
Chinese yuan, digital yuan?
Mr. Baldwin. The U.S. system overall is much more
attractive to international partners. We have rule of law, as
you mentioned, we have settlements in courts, and we also have
a history of responsible monetary policy. The Chinese Communist
Party has a lot of structural issues with its potential digital
yuan. That includes concerns about monitoring, concerns about
overstep and controlling payments going to certain individuals,
and even structural issues such as capital controls.
Mr. Lynch. Very good. Right now, we have about 200
stablecoins that are available, the most popular anyway. All of
those are pegged in some way to a more stable fiat currency.
And the recommendations of the OCC and the SEC were that there
should be a one-to-one digital stablecoin to a stable fiat
currency, such as the U.S. dollar.
But recently we discovered that Tether, which is one of the
most popular so-called stablecoins--their reserves are being
held in commercial paper, which we have seen repeatedly, the
liquidity of which disappears in times of stress.
So, Mr. Baldwin or, perhaps Dr. Coronado, is the way we
design this important? And I know it is taking more time than
any of us would like, but is it important that we try to, I
guess, include that stability that the dollar enjoys in the
design of our digital dollar?
Mr. Baldwin. Yes. The design of a stablecoin is extremely
important, and the reserves backing it, and the auditing
standards of those reserves are extremely important. The
company you mentioned operates as a money service business.
That is a State-by-State regulatory authority that does not
have as much scrutiny as a traditional financial regulator
would.
In the State of New York, the New York Department of
Financial Services oversees stablecoin regulations, and you see
much more responsibly reserved firms providing stablecoins in
that State.
Ms. Coronado. I will add that I don't see any benefit from
not having full reserve backing from a Federal Reserve digital
currency. If what we are looking for here is the advantages of
technology combined with stability, why would we not have 100
percent reserve-based digital currency, and then what the
providers, the stablecoins provide is the innovation on the
technology front?
Mr. Lynch. Thank you very much. Mr. Chairman, my time has
expired. I yield back. Thank you.
Chairman Himes. The gentleman yields back. The gentleman
from Ohio, Mr. Davidson, is now recognized for 5 minutes.
Mr. Davidson. Thank you, Mr. Chairman. Thanks for holding
this hearing. I appreciate our witnesses.
Where Mr. Lynch left off, the architecture and design is
very important. We all recognize the importance, and frankly,
the power that it gives the United States to have the world's
global reserve currency.
As I listen to people put emphasis on that, though, I
wonder whether each of our witnesses thinks it is more
important that the U.S. dollar is the global reserve currency
or that the United States has sound money. Sound money or
global reserve, Mr. Baldwin?
Mr. Baldwin. I think they operate in accordance, together.
Mr. Davidson. Dr. Coronado?
Ms. Coronado. Yes, they go hand in hand.
Mr. Davidson. That is why we became the global reserve
currency. Dr. Levin?
Mr. Levin. I agree. In fact, just to elaborate on what Dr.
Coronado said earlier, we need to--
Mr. Davidson. Sound money or global reserve?
Mr. Levin. Again, they go hand in hand.
Mr. Davidson. One and both. Mr. Fanusie?
Mr. Fanusie. I agree. Both.
Ms. Friedlander. Yes.
Mr. Davidson. Okay. We want them both.
We could really debate whether we actually have sound money
or not, but I think we are doing a nice sample pack of modern
monetary theory. There is no lender for this helicopter money
that Dr. Coronado referred to. We are actually destroying the
dollar, which is why there has been an interest in things that
aren't U.S. dollars. It has created asset price inflation in
our stock markets. People have fled cash reserves for anything
but cash. Wise folks have recognized--Ray Dalio said well
before the coronavirus that, ``cash is trash.'' Not because the
U.S. dollar is bad, but because the monetary policy is bad. We
are destroying the dollar with our fiscal policy, and Dr.
Coronado, integrating fiscal policy with it is horrific.
So the real question is, when you look at what is happening
with the central bank digital currency, some of the aficionados
for this, when I hear Mr. Fanusie laud the Chinese, it almost
seems like there is a coveting of the power that China would
have by being able to create this really creepy surveillance
tool, by being able to know everything about every person,
including every transaction, and frankly, the ability to filter
those transactions, for the power of the state. I guess if you
are a statist, you would actually love that tool.
And if you look at the things that Dr. Coronado is talking
about, and Dr. Levin referenced to perfect the monetary policy,
you could give the Fed more power than they already have, as
the most powerful central planner that we have, to distort the
economy. And frankly, if you want to perfect negative interest
rates, you make sure that people can only hold digital
currencies, because you can destroy the holdings. You can put
expiration dates on people's dollars.
So, these are tools that people are proposing. They are not
said here in public, but they have been mentioned at the Bank
of International Settlements. This is not something that I
think we should seek to do, to empower the central bank to do
these things, but I think about, how did we come to have this
conversation? We largely had it because someone under the
pseudonym, or some people under the pseudonym, Satoshi
Nakamoto, created bitcoin. They made the blockchain secure
architecture, widely known and widely used and very attractive
for its features.
So, when I talk about the features, it is a true
distributed ledger technology. It allows some level of privacy.
And as we have talked about, the challenges for the payment
system, all of these things are already happening, Dr. Levin.
They are already happening. They are happening without a
central bank digital currency. That is part of the beautiful
nature of crypto. Stablecoins, like Paxos Gold, for example,
are stable, and we don't have to have Federal Reserve accounts
to track the value of gold.
So if you look at this--let me just go down the line
quickly--is the permissionless nature of bitcoin a feature or a
flaw? Mr. Baldwin?
Mr. Baldwin. A feature.
Mr. Davidson. Dr. Coronado. Don't know. Dr. Levin?
Mr. Fanusie. Bitcoin is expensive to use and it is slow.
Mr. Davidson. Okay. So you see it as a flaw. Mr. Fanusie?
Mr. Fanusie. It is a feature and a flaw. It can be a flaw,
yes.
Mr. Davidson. Okay.
Ms. Friedlander. Same. Feature and flaw.
Mr. Davidson. Okay. So, it is not a perfect tool. I don't
think that the Fed is going to perfect it unless they find a
way to keep it permissionless.
I yield back.
Chairman Himes. The gentleman yields back. The gentleman
from New York, Mr. Torres, is now recognized for 5 minutes.
Mr. Torres. Thank you, Mr. Chairman. COVID-19 has shown us
the fragility of the American social safety net, a fragility
that stems from a lack of automatic stabilizers. A CBDC, it
would seem to me, would fill a critical void. It would
radically reduce the length and depth of future recessions. It
would bring instantaneous stability to hundreds of millions of
Americans in times of economic instability.
I know there are concerns, but it seems to me the
systemwide stability that it would bring outweighs all of the
cost. Mr. Levin, do you have any thoughts?
Mr. Levin. I just want to say again here that for decades,
normal people in small businesses used U.S. dollars. We have
stable money, not all the time. We had a Great Depression that
was horrible and prices dropped 30 percent. It is critical for
the Federal Reserve to be able to make sure that never happens
again. But people like being able to use dollars. I think the
Federal Reserve can create a digital dollar that people who
want to can hold it and use it. We believe in civil liberties--
Mr. Torres. But my question is, would it make the economy
more resilient?
Mr. Levin. Yes, it would, of course. We talked about this
before. And it would help make sure that emergency assistance
to families and small businesses--
Mr. Torres. And I just want to interject for a moment. What
are the benefits and costs of a one-tier CBDC model versus a
two-tier model?
Mr. Levin. Okay. I think--
Mr. Torres. As succinctly as you can.
Mr. Levin. Okay. I will try. I think it is critical to have
a public-private partnership, which is what maybe you are
referring to as a two-tiered system. The Fed creates reserves
that the wallet providers can hold, 100 percent reserves. But
the wallet providers are competing with each other, and in that
sense, it is not so far from what Mr. Baldwin described as the
stablecoin kind of competition, except every stablecoin has 100
percent reserve backing. They are all called digital dollars.
They don't have to be called Stablecoin 1 and Stablecoin 2. But
that is tier two, and that is the best system, a public-private
partnership with competition among providers.
Mr. Torres. One of the pillars of America's prosperity is
the primacy of the dollar. What implications would the rise of
CBDCs have for the dominance of the dollar, and what does that
mean for the American economy in the long term? Mr. Fanusie, do
you have any thoughts?
Mr. Fanusie. Short term, long term, and it depends on how
we navigate the CBDC environment. I think most of us actually
agree--especially the economists--that CBDCs, in the short
term, are not going to displace the U.S. dollar, for all of the
reasons that we have been discussing. And I think the broader
issue is, what will be the role of the dollar in an environment
where there are CBDCs, that they proliferate, and that they are
more popular for cross-border use? You could think that maybe
the Sputnik moment would be, if we are going to look for one,
the Sputnik moment might be when we see those first retail
CBDC-to-CBDC transactions happen successfully, not just, ``in
the lab.''
Mr. Torres. I want to interject. Cybersecurity. In the
first half of 2021, we have seen an explosion of cybercrimes in
general, and ransomware, in particular--the Colonial Pipeline,
JBS, even the New York City Law Department. Cybersecurity
Ventures projects that the cost of cybercrime could reach as
much as $10.5 trillion by 2025.
What impact would CBDCs have on what appears to be the
exponential trajectory of cybercrime and ransomware? It seems
to me the use of centralized ledgers, in particular, by
authoritarian regimes, would be a dream come true for cyber
criminals. So what does this mean for cybersecurity? Mr.
Fanusie, do you want to--
Mr. Fanusie. It absolutely raises the risk. This is
probably one of the features that hasn't been studied, because
we are at such an early stage of discussing CBDC design. But
this would absolutely be one of the most critical risk areas.
Ms. Coronado. Can I add, though, that it is also an
important benefit, because right now what we have seen, both
through the cyberattacks and the lack of payments in the
crisis, is that we don't have a digital infrastructure. And
allowing the Fed, or mandating that the Fed move forward with a
digital currency would require an investment in that
infrastructure that would bring huge benefits. We don't have
best practices. We don't have resiliency. We don't have
agencies that are tasked with this. And that leaves us more
vulnerable, and this sort of multiple agencies, and the FBI
getting involved. If the Fed is backing a digital currency, you
can be sure they are going to have a lot of investment in the
resiliency and the technology.
Mr. Torres. My time has expired. Thank you.
Chairman Himes. The gentleman yields back. The gentleman
from Texas, Mr. Sessions, is recognized for 5 minutes.
Mr. Sessions. Mr. Chairman, thank you very much, and to our
panel, thank you for taking the time to be with us today.
Mr. Davidson led us through what tried to be a lightning
round, so perhaps I want to continue that.
Dr. Coronado, is this about the underserved, the new
generation, or an international race?
Ms. Coronado. All of the above.
Mr. Sessions. Today we have, by and large, through the
central bank and through the free enterprise system, something
that we have a system that is safety and soundness. It sounds
like, to me, as we aggregate all this, that someone would have
an account through a transaction. Does that extend credit to
them also?
Ms. Coronado. In our proposed system, it would not. It
would be limited to retail payments only. There would not be
credit extended. It would not be a fractional reserve system.
Mr. Sessions. In other words, what you are suggesting is
that the cash that exists in the account or on a card would be
what they would be extending.
Ms. Coronado. Yes.
Mr. Sessions. It sounds to me that the risk to the central
bank is low.
Ms. Coronado. The risk to the central bank from--
Mr. Sessions. Well, you can only have an account with money
in it, and you can only exchange the money that you have.
Ms. Coronado. Right.
Mr. Sessions. So this really is, in my opinion, as you
suggest it is, for a new generation.
Ms. Coronado. Right.
Mr. Sessions. It is for the underserved, and it is to make
sure that the American system would be one that is resilient
but that would be based on day-to-day opportunity, not long
term, of spending.
Ms. Coronado. Correct. I do definitely see it as an
enhancement to safety and soundness, that we don't really have
a choice. We are losing it, as we speak.
Mr. Sessions. So in other words, really what this is about
is to make sure that--we hear these stories, or I have in my
past, about Africa, that you have a good number of people who
may be out in a rural area, and they still need to be able to
have transactions. That is really what this is about.
You had spoken about what is the biggest challenge. What is
the biggest challenge?
Ms. Coronado. To implementation?
Mr. Sessions. You are the one who said we have--earlier in
your testimony, you referred to a big challenge.
Ms. Coronado. I think the big challenge right now is the
lack of digital infrastructure, and that the world is moving
ahead while we are standing still. So both in terms of the
cybersecurity issues and the payment innovation issues and the
global transaction issues are all moving ahead and we are not
moving with it. That creates a great challenge to safety and
soundness, both domestically and the reserve currency status
that we enjoy. So I don't think it is an option to stand still.
I think we need to be engaged, and not only be engaged but play
a leadership role in this.
Mr. Sessions. Would you see that as the maturity of this
takes place, that a person who is in an underserved area or who
does not have an account would walk into a bank or a credit
union or some financial institution and just use it like a gift
card, as a one-time use? Is that the way you see this?
Ms. Coronado. There are different ways. There is the
account-based, in which would be a transactional account, where
you are moving the money around different accounts. And then,
there is sort of a token system. I think the Sand Dollar has
both, and you could do a system of both.
I think that primarily, the U.S. would be an account-based
system, just because you are going to need those digital
payment providers to provide some of the know-your-customer and
anti-money laundering oversight for these accounts, I think.
But there could be an additional sort of tokenized card feature
to it as well.
Mr. Sessions. Good. I think this clarity has been very good
for me to understand, actually, that it would be something
where someone would have an account. It would be offered with
the bank, but it would be an account that we would not be
extending credit but it gives them an opportunity to use it in
the marketplace.
Mr. Chairman, thank you for the time. I yield back.
Chairman Himes. The gentleman yields back. The gentlewoman
from New York, Ms. Ocasio-Cortez, is now recognized for 5
minutes.
Ms. Ocasio-Cortez. Thank you so much, Mr. Chairman, for
convening this hearing, and thank you to our witness panel for
being with us today.
I want to take the time today to explore some of the
implications of central bank digital currencies for folks kind
of following at home. A digital dollar would resemble, in
certain ways, cryptocurrency, such as bitcoin or Ethereum, in
certain limited respects, but in different, very important ways
as well.
Dr. Levin, rather than a tradable asset with wildly
fluctuating prices that we see in certain crypto markets, and
limited real-life use as a currency, a central bank digital
currency would function more like dollars and have more
widespread acceptance, presumably. Correct?
Mr. Levin. Right. The point is that the central ledger, in
an electronic world, you can have instant, free, secure
transactions. That is why, coming back to this other thing,
when I think about the digital world, like cellphones, we don't
say, ``Well, is this for work or is it for home?'' It is for
everything. And so, it is all of the above.
And so absolutely, having a free, safe, secure, instant
transaction platform that every American can use is what we
should have had already, and we need it now.
Ms. Ocasio-Cortez. Great. Thank you. And just to clarify,
it would also be fully regulated under a central authority,
right?
Mr. Levin. I think there has been some agreement among a
number of us at this table that the issue would be 100 percent
backed by reserves held at the Fed. So, there is no concern
that the stablecoin provider might go bankrupt, and then there
is a panic--
Ms. Ocasio-Cortez. Thank you. I'm sorry. I just have
limited time.
Economists like Claudia Sahm have--and as we have heard
throughout the hearing--agreed that direct stimulus payments
like the checks that Americans received during the pandemic can
shorten recessions. And although stimulus payments helped
stabilize the economy during the pandemic, delivery was
sometimes slow. And even the IRS and the Treasury just
announced last week that 2.2 million stimulus payments were
made in late July. These were the stimulus payments that people
got months ago, after the original passing of the American
Rescue Plan.
This is not because of technical payments getting lost in
technology or bureaucracy; it is because the most vulnerable
people in our society are the hardest to reach, people who
don't have consistent mailing addresses, people who are
unbanked, a lot of times because it is too expensive to be
banked, people who don't file taxes because they make too
little money. And these are real issues.
And so my question is with the CBDC; it is all about the
design. It is not just the idea. It is the execution, design,
and implementation. My question is, in that similar vein, what
would make a well-designed CBDC system that helps overcome some
of these existing issues that we have seen with banks and with
just the delivery of stimulus checks? Ms. Coronado?
Ms. Coronado. One of the key pieces of the design is that
the lower-income households should have no fees whatsoever to
engage, and that some of the technology access questions would
be part of the infrastructure that is built. And whether that
is a digital card that they are provided, or kiosks, some sort
of access to their accounts that is free and built and
available to them to engage in the transaction space.
Ms. Ocasio-Cortez. Got it. And there has been some
discussion, even most recently, and we heard in the last few
minutes, about two-tier system. And Dr. Coronado, in your
testimony you state that, ``Preserving a two-tier system of
private providers would promote competition and end continued
innovation, while Fed oversight would promote that safety and
soundness.''
Now, by two-tier systems, you are referring to how certain
banks, like Wells Fargo, Bank of America, or JPMorgan, can bank
with the Federal Reserve but regular Americans cannot. Right?
That is what you are alluding to? Okay.
I just want to be clear here, just for clarification. There
is no legal, technical, or operational requirement as to why
banks or private payment companies need to be involved.
Correct? In other words, the Federal Government could provide
public digital currency services directly to the public if it
wanted to, like the Postal Service?
Ms. Coronado. Sure. Yes.
Ms. Ocasio-Cortez. Okay. Thank you.
I think one of the things that we are seeing here is that
we are facing a choice. Congress is facing a choice of whether
we want to give Wall Street another tool of being in charge of
the public's money and payments, or whether we can potentially
establish a public option here as well.
One concern that we hear in CBDC conversations--my time is
up. I am sorry that I can't get to the last question. I will
submit it for the record. Thank you.
Chairman Himes. The gentlelady yields back. The gentleman
from Minnesota, Mr. Emmer, is now recognized for 5 minutes.
Mr. Emmer. Thank you, Chairman Himes and Ranking Member
Barr, for hosting this hearing to discuss national security,
privacy, and competitive implications of a potential United
States digital dollar.
As we carry on these discussions, on and off the committee,
we must not forget that the benefit of having a digital dollar
would only come to fruition if it were open, permissionless,
and private. Any attempt to craft a central bank digital
currency that enables the Fed to provide retail bank accounts
and mobilizes the CBDC rails into a surveillance tool, able to
collect all sorts of information on Americans, would do nothing
other than put the United States on par with China's digital
authoritarianism.
Our banks and Fintechs--that is okay; you can laugh, but it
is real, and it is happening. You talk to the Chinese, what
their government is doing to them. Our banks and Fintechs are
doing a great job serving their customers and expanding access
to financial services. It is the competitive marketplace of the
private sector that facilitates that achievement. For this
reason, I am deeply concerned by Chair Powell's recent comment
before the Full Committee that the strongest argument in favor
of central bank digital currencies is that, ``You wouldn't need
stablecoins. You wouldn't need cryptocurrencies if you had a
digital U.S. currency.''
Our government should never be in the business of designing
a tool that would wipe out an entire innovative private market,
a market that creates far more capital and provides far more
high-tech jobs than the government will ever be able to do.
More than anything, cryptocurrencies, stablecoins, and other
private-market blockchain innovations open doors to immense
opportunities for Americans. These decentralized projects have
an underlying code that is open source, meaning anyone can find
it, study it, verify it, and build projects on top of it. It is
in this way that crypto and blockchain expand opportunity for
everyone, whether that is financial inclusion or capital
formation or tech innovation. With cryptocurrencies, no one has
to ask a bank or a corporation, or perhaps most importantly,
their government, for permission to start a project or launch a
business or get a loan. That is the way it should be.
And, by the way, it is interesting how cryptocurrencies
have grown as government seeks to grow ever bigger and try to
make decisions for the public. The size and scope of government
versus the right of an individual to self-determine is exactly
what is pushing the development in this area. And it is great
to have all of you here to talk about this wonderful topic, but
I will tell you, if we don't start to figure this out and get
ahead of it, this market is going to happen with or without us,
and it is going to happen here or somewhere else.
Mr. Baldwin, in your testimony, you mentioned that
international competition is decreasing in the United States'
role in international finance and that our lack of a CBDC plays
into that. It is my belief that decentralized technology like
cryptocurrencies and the blockchain technology that they sit on
maintain a fundamental American principle, that is, individual
privacy, a free marketplace, and competition with innovation.
Why should the Fed focus on uplifting private crypto markets
and blockchain innovation rather than crafting a CBDC that
wipes out this great industry, or has the potential, according
to Chair Powell, to wipe out the industry? Specifically, can
you touch on how a thriving crypto and blockchain industry in
the United States could make the United States of America more
competitive with respect to international finance?
Mr. Baldwin. I think the goal of this hearing is to promote
faster, cheaper, and easier-to-use payment mechanisms. A
private sector-led approach opens a lot of opportunities in
areas such as micropayments. That is engineering jobs. That is
jobs for salespeople. Creating innovations such as real-time
payments. So if you are an hourly worker, getting paid for the
hours you work in real time. Or if you are a music producer,
getting paid for your streams. These previous transactions that
are low cost were unfeasible in our current system.
So, a private sector approach really promotes opportunities
to innovate in different areas and have private developers see
a need for it in the market and then go and develop the tool.
Mr. Emmer. Mr. Baldwin, in the few seconds I have left, is
there any reason in the world why a free market constitutional
republic with free citizens, able to self-determine, should
want to emulate a communist party-driven, authoritarian-type
digital currency program?
Mr. Baldwin. The Chinese central bank digital currency
approach has a lot of negatives in areas such as consumer
privacy. Any approach the U.S. takes should make sure to steer
clear and respect the privacy of American citizens.
Mr. Emmer. Thank you. I see my time has expired.
Chairman Himes. The gentleman yields back. The gentleman
from Illinois, Mr. Foster, is recognized for 5 minutes.
Mr. Foster. Thank you, Mr. Chairman. If you are going to
prevent digital dollars from being used for ransomware, money
laundering, child trafficking, terrorism, you name it, is there
any alternative to having a secure and legally traceable
digital identity for all participants?
Ms. Coronado. Not for the bulk of the transactions, no.
Mr. Foster. Does any one of you believe that a digital
dollar that can't be abused in this way can be implemented
without having every transaction tied to a legally traceable
participant?
[No response.]
Mr. Foster. So, that is pretty much a precondition for a
central bank digital currency, having a digital identity.
Mr. Levin. A question that I think the Federal Reserve
should look at, and other central banks are looking at is,
could you have a $5 prepaid card that you could take up into
the mountains--
Mr. Foster. So, you would have de minimis threshold--
Mr. Levin. Yes, de minimis, okay, but I think for sure,
once we are talking about--
Mr. Foster. Significant amounts crossing borders
especially.
Mr. Levin. Absolutely.
Mr. Foster. Okay. So it seems like the starting point for
this is to get a digital identity ecosystem working in our
country, and then interoperable. Because if we wish to have an
effective means of preventing this, we have to identify people
and say, ``You cannot use digital dollars because you are an
identified terrorist.'' Okay? Is that pretty much going to have
to be a feature of any system, whether it is stablecoins or
anything else that cannot be abused?
Mr. Levin. I think in civil liberty, no one should be
required to have a digital identity, but if they don't have it,
then they can't use that system.
Mr. Foster. Okay. I agree. Does anyone disagree? Mr.
Baldwin? So, your members are on board with having every one of
the transactions associated with a unique, legally traceable
digital identity for the participants?
Mr. Baldwin. Any system needs to be in compliance with the
Bank Secrecy Act.
Mr. Foster. No, that is obviously not enough to prevent a
lot of the bad things that happen. I am talking about having a
legally traceable identity associated with each transaction.
Mr. Baldwin. Legally associated as long as it meets with
the rules set forward with the Financial Crimes Enforcement
Network (FinCEN) in association with--
Mr. Foster. But FinCEN would like the rules strengthened,
frankly, because there are a lot of holes in the current
system, and a lot of terrorism and child trafficking, you name
it, ransomware. So it seems if you just look at ransomware
alone, when your screen locks up and it says, transfer X amount
of your digital assets into this account, you have to be able
to go to a court system you trust, find out who is behind that
account, unmask them, and, if necessary, get your money back.
Is that a necessary feature of a system, the digital dollars
that can't be abused?
Mr. Baldwin. Responsiveness to court of law is an important
feature.
Mr. Foster. Well, we will get back to that. It seems to me
that it is, and I think the rest--yes, Ms. Friedlander?
Ms. Friedlander. Yes, and I would say an ideal system seeks
to replicate the current KYC orchestration and system that we
have with commercial banking now. And as you rightly
acknowledged, there are holes in the system and there are
things that should be strengthened, but there is a possibility
to design this so that you would have the same access to
information balanced by the same privacy protections as you do
under the current system.
What I would acknowledge, though, is that illicit financial
actors, as you say, are very good at eluding the system as it
currently is. So through complex legal structures, through
high-risk jurisdictions, that is the bread and butter of money
laundering. So, I think I would caveat when we say that a
digital dollar, whether it be central bank-based or stablecoin,
doesn't necessarily say that this is an instrument designed
with the knowledge that it will increase our exposure to
illicit--
Mr. Foster. Okay. But we are going to need a mechanism to
tell someone, ``I'm sorry, you cannot transact in digital
dollars because we have identified you as an international
gangster,'' or you name it, or a terrorist. And so really,
operationally, we will set different standards, but it is not
different than what the Chinese are doing. The only difference
is we are going to designate terrorists. We are not going to
designate Hong Kong democracy protesters as terrorists, and
they are, and that is really the only difference. We have to be
able to exclude participants, and we have to uniquely identify
them as well, so that you can't be operating multiple
identities in multiple jurisdictions.
So really, it seems to me that is kind of non-negotiable in
this.
Mr. Levin. I strongly disagree. I think that a key reason
for the two-tier system we have been talking about is to
protect privacy so that you need a court order, a search
warrant--
Mr. Foster. Oh absolutely.
Ms. Coronado. --which is very different from China. In
China, the government wants direct control of the data.
Mr. Foster. Correct.
Ms. Coronado. We are creating a--
Mr. Foster. There has to be a mechanism to unmask
participants when malfeasance is suspected, and there has to be
a way to de-dupe participants so you can't be using multiple
identities in different jurisdictions. And that is not a
feature of a lot of the stablecoins and other crypto assets,
and I think it is going to end up having to be.
Anyway, my time is up, and I yield back.
Chairman Himes. The gentleman yields back. We are going to
implement a very brief second round for the chairman and the
ranking member to just clean up some questions.
Mr. Foster, if you would like, I will kick off my 5
minutes, before recognizing the ranking member for 5 minutes,
by yielding 2 minutes to you.
Mr. Foster. That would be wonderful.
Chairman Himes. I yield 2 minutes to the gentleman from
Illinois.
Mr. Foster. Yes. Thank you. This also becomes an issue for
when we had to dispense stimulus checks. The issue we had is we
did not have a unique, legally traceable identity for all
qualifying citizens in the United States. There is a product
called a Mobile ID or a digital driver's license, that is being
dispensed by a lot of States--5 or 10 States are actually
already using them. This thing, it is not a new database or
anything. What it is, it just sits on top of the REAL ID
system, which pretty much is a unique, legally traceable
identity for all citizens, and then transfers that information
to your cellphone. And that allows you to use your cellphone,
your REAL ID, to authenticate yourself online as a single,
legally traceable citizen of the United States.
Is that an appropriate starting point as the identity
credential that you will need to operate a central bank digital
currency?
Ms. Coronado. It is an intriguing starting point, sure. To
the extent that you can use existing infrastructure for that,
then it could create a lot of efficiency.
Mr. Foster. Yes. NIST has actually negotiated iso-standards
for these, for interoperability, for multiple vendors. Google
and Apple have announced that they will support these digital
driver's licenses. So, I would be interested in your comments
for the record as to whether those are appropriate. If that was
the de facto way that you authenticated yourself for using
digital dollars, what would be missing in such a system, in
terms of preventing fraud and so on, and how useful would that
be for dispensing things like stimulus checks or other Federal
benefits?
Anyway, I am now pretty much out of time. One last comment
and--
Mr. Levin. Another big advantage of a two-tiered system is
you can have nonprofit organizations that start to help
ordinary people and small businesses use these digital dollars.
So, imagine that the AARP starts helping retired people, and
they might have an app, or it is a card or whatever, a prepaid
card that is big, that has braille on it, that is really great
for people with visual or audio disabilities. Okay, there is an
urban organization that is helping lower-income people and
disadvantaged people in communities that we can have different
designs. The fundamental concept here of digital doesn't
require all one paper identical bill, there could be lots of
competition and lots of diversity, and helping a lot more
people than the current payment system.
Mr. Foster. I am going to reclaim my time because I do have
one question for Dr. Coronado. We were cut off. I am very
interested in something that we haven't talked a lot about,
which is the potential adverse effect on the traditional
banking system in moments of stress and crisis. And again, we
talked a little bit about how you could cap the size of an
account. But could I give you a minute or two to talk about
what other mechanisms might be in place to make sure that we
don't see a flight to safety, and therefore an exacerbation of
problems inside the traditional banking sector?
Ms. Coronado. The limitation and the integration between
the systems would be part of the design, I think. So, the
limitation on the account size would mean that the system
wouldn't get too big or wouldn't usurp the existing banking
system, which is where most of the money is in wholesale
banking anyway. The retail banking system would be necessarily
limited in size. That is the first pillar of preventing that
kind of cyclicality. And then, you could have sort of the
ability to speak between the banking accounts. The banking
account would be integrated with your digital account, and that
could also mean that the money flow back and forth wouldn't be
as destabilizing.
I don't know. Do you have any--
Mr. Levin. Michael Bordo and I have thought a lot about
this. Our recommendation is, during emergenciesc, to think
about these digital dollars like a safe deposit box. And the
right solution would be to, in an emergency, for large amounts
of digital dollars, to impose a safe deposit box fee, which
could be 1 percent or 2 percent, enough to discourage huge
institutions from moving all of their money out of the
commercial paper market into digital dollars.
So, I think this is a totally solvable problem. There might
be some--
Ms. Coronado. The limitation is that you couldn't move that
size of money. It couldn't destabilize the commercial paper
market in our design. It just wouldn't be--the scope would not
be available for that.
Chairman Himes. Okay. Great. I appreciate those answers. I
will yield back the balance of my time and recognize the
ranking member, Mr. Barr, for 5 minutes of additional
questions.
Mr. Barr. Again, Mr. Chairman, thank you very much for your
leadership on this issue and for holding this hearing on what
is clearly a pressing issue, urgent, and important for national
security, for the unbanked, for personal privacy and civil
liberties. A lot of issues were covered today. So, I have one
final comment and then a question.
The comment is, I think what we learned today was that
Chairman Powell was absolutely right about getting this right
as opposed to getting there first. I think there is urgency,
and so I think we do need to move forward with urgency, but
getting it right is so critically important.
And I think we learned that there are some dangers
associated with privacy, with manipulation of monetary policy.
I appreciate my colleague from Massachusetts recognizing that
this is blurring the lines, Dr. Coronado, between fiscal policy
and monetary policy.
Ms. Coronado. They have already been blurred.
Mr. Barr. And let me also just say--well, that is true. And
I think we need to restore the Fed to be monetary policy only,
and accountable. Yes, independent, but accountable to Congress,
and Congress and the elected officials of this country should
be the fiscal policymakers in this country.
The other concern is the concern that the chairman just
raised, and the possibility that this could get out of control
to the point where a central bank digital currency is making an
end run around the private commercial banking system.
So, what I have concluded is that direct Fed accounts is
probably not the way to go, that two-tier is a--if we are going
to go in this direction for purposes of sanctions and
effectiveness, sanctions enforcement for purposes of dealing
with the competitiveness challenge from China, and preserving
the dollar as the world's reserve currency, if this is the
direction we need to go to pursue and protect those ends, then
we have to be careful about making an end run around the
private banking system, compromising privacy, and manipulating
monetary policy in a way that irretrievably blurs the
distinction between monetary policy and fiscal policy.
I will conclude with a question that I have for Mr.
Baldwin. What is, in your view, the danger of the Fed holding
so much consumer information, if we move in this direction of
using accounts at the Fed as opposed to a two-tier system where
you would have, to the extent that we move in the direction of
a central bank digital currency, private sector control of
wallets?
Mr. Baldwin. Across all financial services, I think the key
thing that keeps everybody up at night is a wide-scale
cyberattack. Any time you are dealing with an account-based
system that has everything in one centralized place, that is a
prime target for nation states, cyber warfare. Just
intermediating and having different troves of information,
potentially facilitated by the private sector, makes it more
difficult to go after one strategic source that would take down
an entire system.
Mr. Barr. And you believe that it is possible to do this,
to set up a central bank digital currency that is sophisticated
enough to guard against that kind of a threat?
Mr. Barr. An account-based approach would be similar to
traditional banking, so that there would be widescale cyber
implementations that need to occur. Something occurring on a
ledger system, so a tokenized system, would have different
security considerations. But blockchain technology, time and
time again, has shown to be a very secure method and means of
transfers of value.
Mr. Barr. Thank you all for your testimony. We clearly have
more work to do on this, and that is why I endorse the
legislation that Mr. Hill and our chairman have authored, and I
do echo Mr. Hill's comments to encourage our chairman here to
see if we can get some of these bills in a markup.
With that, thank you to all of the witnesses for your
important and illuminating testimony today, and I yield back.
Chairman Himes. I thank the ranking member, and I really
would like to thank our witnesses for their testimony today in
what was a fascinating conversation.
The Chair notes that some Members may have additional
questions for these witnesses, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
And, without objection, I would like to enter into the
record statements from the American Bankers Association, Public
Citizen, and the National Association of Convenience Stores.
Without objection, it is so ordered.
With that, I thank the witnesses again, and this hearing is
adjourned.
[Whereupon, at 12:13 p.m., the hearing was adjourned.]
A P P E N D I X
July 27, 2021
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